2009 Volume 15 Issue 2 Pages 251-265
This paper addresses some issues that arise in connection with the effects of government borrowing on an economy, particularly that of a developing country. We empirically investigated the case of Indonesia to address this problem. The analysis is intended to illuminate ongoing discussion related to the roles of domestic and external debt. The problem implies that the government is confronted with a choice between external and domestic debt. Government borrowing has apparently been a part of reasonable strategies; particularly, foreign debt has played a central role in Indonesia’s experience. In particular, the rising trend of domestic debt subsequent to the financial crisis 1997 has not attracted much attention. Therefore, we used a macroeconometric model and found a primary result that the rising trend of domestic debt discouraged private investment because of the so-called crowding-out effect.