Macroeconomic Factors and Current Account Deficit in Indonesia

This study aims at investigating the relationship between macroeconomic factors and Indonesia's current account deficit (CAD). This study employed time series data with up to 42 observations from 1980 to 2021. The vector error correction model (VECM) was implemented for data analysis because it can dynamically describe the short and long-term impacts of macroeconomic variables on the CAD. It is considered that macroeconomic variables that have the potential to determine the CAD are fiscal balance (FB), growth of GDP (GRGDP), inflation (INF), a real effective exchange rate (LNREER), terms of trade (TOT), and trade openness (TRADOP). The findings show that FB has no effect on the current account in the short and long-term. Meanwhile, lag 1 GRGDP, lag 1 INF, and lag 1 LNREER has a positive effect on the current account. On the other hand, TRADOP has a negative effect on the current account at lag 1 and TOT has a long-term positive effect. This study suggests that the government should optimize and synchronize economic policies and efforts to improve the current account performance.