International Journal of Sustainable Development and

Planning
Vol. 18, No. 5, May, 2023, pp. 1351-1363
Journal homepage: http://iieta.org/journals/ijsdp

Shock Response Analysis of Indonesian Macroeconomic Variables

Syamsul Amar , Alpon Satrianto , Ariusni , Anggi Putri Kurniadi*

Faculty of Economics, Universitas Negeri Padang, Padang 25132, West Sumatra, Indonesia

Corresponding Author Email: anggikurniadi@student.unp.ac.id

https://doi.org/10.18280/ijsdp.180505 ABSTRACT

Received: 15 February 2023 This study aims to analyze the shock response between the variables of economic growth,
Accepted: 18 April 2023 consumption, investment, government spending, export, poverty, unemployment and income
inequality in all provinces in Indonesia during 2015-2021. This research is important because
Keywords: promoting economic stability is a major goal of economic policy and allows other
macroeconomics, response, shock macroeconomic goals to be achieved. The novelty of this study is to analyze shocks to
macroeconomic variables consisting of economic growth, fiscal indicators, monetary
indicators and welfare indicators by using the Panel Vector Autoregression (PVAR). The
results of the study conclude that there is a causal relationship between unemployment and
export; unemployment and poverty; poverty and export; unemployment and poverty.
Furthermore, variables that have a one-way relationship such as economic growth affect
consumption; consumption affects government spending; government spending affects
investment; investment affects export. The recommendations from this study require that the
government must be proactive in encouraging other elements, such as the private sector, which
has a big role in helping government programs run optimally. The limitation of this research
is the research methodology because all the research variables are endogenous and only
analyze balance in the long run.

1. INTRODUCTION shocks due to fluctuations every year. However, the focus of

attention on several macroeconomic variables in Figure 1 is
The economic system tends to create linkages between the trend of economic growth because economic growth serves
macroeconomic variables [1-6]. The linkages between as a benchmark for the success or decline of a country's
macroeconomic variables will lead to balance and can impact economy and an indicator of people's welfare. When economic
people's welfare [7-15]. Concretely, if one of the variables growth experiences shock, there are various unstable
experiences a shock, the other economic variables will also economic indicators. The condition of economic growth in
respond. For example, when there is a decline in economic Indonesia during the period 2017 to 2020 tends to experience
growth, this condition will be responded to by increasing a negative trend, while conditions will contrast in 2021.
unemployment, poverty, income distribution inequality, and
so on. On the other hand, an increase in the decline in
investment will be responded to by a decrease in economic
growth, weakening consumption, and increasing poverty.
The level of response to changes that occur in a
macroeconomic variable as a result of a change in a macro
variable is determined by the level of sensitivity of the
macroeconomic variable and the existing economic conditions.
At that time, it has the potential to cause shocks to other macro
variables [16-22]. The level of shocks tends to trigger an
imbalance in an economic system which must be followed up
with effective policies so that the economy is always in
balance [23, 24]. Figure 1. Growth conditions of various macroeconomic
Based on the background of the empirical phenomena variables in Indonesia [25]
described, this condition is in line with the factual phenomena
that have occurred in Indonesia in the last five years, which as Economic growth in Indonesia experienced a slight decline
a developing country, tends to experience shocks to of 0.02 points in 2018 of 5.17 percent compared to 2017 of
macroeconomic variables. Conditions for the growth of 5.19 percent. This condition was caused by increasing global
various macroeconomic variables in Indonesia can be seen in uncertainty from the external sector, both from the trade
Figure 1. channel and the financial channel. From the trade channel,
The information obtained from Figure 1 shows that export performance declined due to slowing world economic
macroeconomic variables in Indonesia tend to experience growth and falling commodity prices. Moreover, the

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challenges from the trade channel are getting stronger because, literature review; research methods; results and discussion;
at the same time, the demand for imports for domestic and conclusions.
infrastructure projects is quite large. Meanwhile, the challenge
from the financial channel is the reduced inflow of foreign
capital to developing countries, including Indonesia, due to the 2. LITERATURE REVIEW
increase in the US monetary policy rate and uncertainty in
global financial markets. 2.1 Economic growth
Furthermore, economic growth in Indonesia decreased
again by 0.10 points in 2019 by 5.07 percent compared to The relationship between economic growth and several
2018. This condition was caused by structural shifts in the macroeconomic variables has been widely studied by previous
global economy, which had an impact on weakening world researchers [1-5]. Economic growth will encourage an
economic growth, posing challenges to the 2019 domestic increase in income so that consumption will increase and
economy. The economy in 2019 was not as strong as the unemployment will decrease so that it will reduce poverty.
previous year's growth, although it remained resilient, Economic growth that is too high is also not good because it
supported by good domestic demand and maintained stability. can increase the money supply and inflation. This means that
Then, economic growth in Indonesia decreased sharply by changes in one variable will have a systemic impact on other
3 points in 2020 by -2.07 percent compared to 2019. This variables. Previous studies on economic growth have been
condition occurred because the Corona Virus Disease 2019 carried out by various researchers, in which they linked it to
(COVID-19) pandemic had an extraordinary influence on the various macroeconomic variables, including consumption
dynamics of the world economy in 2020, including Indonesia. playing an important role in increasing a country's economic
COVID-19 spread to nearly 178 countries worldwide and growth because consumption will encourage production such
infected more than 85 million people, bringing more than 1.8 as product manufacturing and product distribution so that this
million deaths in 2020. This condition created a health and condition will drive the economy [26]. Then, investment is one
humanitarian crisis, an economic crisis, and increased poverty. of the solutions for economic recovery in a country because
In addition, various macroeconomic indicators pointed to the many businesses that have sprung up will open up more
sharp pressures on consumption, investment, and production jobs, thereby boosting the economy [27]. Furthermore,
activities, resulting in a decline in international trade. government spending is needed to increase physical capital
Different conditions for economic growth in Indonesia in [28]. In addition, export has contributed as an injection
2021 amounted to 3.69 percent,which has increased by 1.62 variable in a country's economy. If a country's export increase,
points compared to 2020. This condition occurs because the then the country's economy will increase even more due to a
process of national economic recovery continues with stability multiplier process [29]. On the other hand, high poverty will
being maintained. However, the process of recovering the cause the costs to be incurred to carry out economic
domestic economy in 2021 will still be affected by the development to be greater, hindering economic growth [30].
continuation of the COVID-19 pandemic. In addition, the The same condition for unemployment tends to reduce
outbreak of the COVID-19 variant of the Delta in the third economic growth due to low public purchasing power, so it
quarter of 2021 is holding back the process of Indonesia's does not encourage an increase in output [31]. Finally, income
economic recovery. Nevertheless, economic performance is inequality will reduce people's purchasing power forgoods or
predicted to increase in the fourth quarter of 2021, supported services. An increase in output that is hampered will result in
by mobility that continues to increase in line with the economic growth will alsobe hampered [32].
acceleration of vaccination and the waning spread of COVID-
19, the opening up of broader economic sectors, continuing 2.2 Consumption
policy stimulus, and export performance that remains strong.
Based on this explanation, this study will examine Consumption drives output in the economy [22-24].
macroeconomic variable shocks in Indonesia. This is Increased output impacts growth, ultimately affecting the
important because a balanced economy is related to variables of poverty, unemployment, income distribution,
macroeconomic stability, which occurs when macroeconomic money supply, and inflation, respectively. Previous studies on
indicators move in a favorable direction and do not change consumption have been carried out by various researchers, in
much over time. Promoting economic stability in a country is which they associated it with various macroeconomic
a key objective of economic policybecause economic stability variables, including economic growth, which will have an
allows other macroeconomic objectives to be achieved, such impact on increasing people's purchasing power due to output
as stable prices and sustainable growth, creating the right expansion, which in turn directs people to use their income to
environment for increased employment and balance of buy goods and services so that demand increases towards
payments. In addition, macroeconomic stability is important goods and services increased [33]. Then, the investment will
in making economic decisions because it makes it easier for positively impact the production process in an increasingly
businesses to predict economic indicators. Conversely, active business, which will also impact increasing household
instability can increase uncertainty,hinder investment, hamper consumption [34]. Furthermore, government spending
economic growth, and reduce people's living standards. The contributes to increasing public consumption because it is
novelty of this study is to analyze shocks to macroeconomic allocated to finance goods and services, employee salaries, and
variables consisting of the economic growth, fiscal indicators payment of subsidies or direct assistance to various groups of
(government spending), monetary indicators (investment and people [35]. In addition, export negatively correlate with
export) and welfare indicators (consumption, poverty, public consumption because an increase in export will require
unemployment and income inequality). The structure of the the public to carry out export activities efficiently, so this
description of this article for the next section consists of a condition does not encourage consumption [36]. Contrasting
conditions for the effects of poverty, unemployment, and

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income inequality on consumption have a negative effect increasing output for domestic consumption and even foreign
because these three problems will reduce people's welfare and consumption [48, 49]. Furthermore, poverty, unemployment,
purchasing power [37-39]. and income inequality will reduce export because these
problems require the government to increase a large
2.3 Investment expenditure budget to implement programs to improve
people's welfare [50].
Investment is necessary for the economy of any country.
Investment can drive high demand for inputs, one of which is 2.6 Poverty
labor. This will reduce unemployment, poverty, and inequality
in the distribution of income. This effect does not stop here; Economic growth, investment, and government spending in
this condition will also impact consumption, economic growth, various research findings have an impact on reducing
and others [14-16]. Previous studies on investment have been unemployment [10-19]. As a result, existing poverty will
carried out by various researchers, in which they associated it decrease. If this is done evenly in all regions, it will also
with various macroeconomic variables, including economic increase income distribution. Previous studies onpoverty have
growth and high government spending in a country which is been carried out by various researchers, in which they
one of the factors that encourage investment activity by associated it with various macroeconomic variables, including
investors because of the significant opportunities for high economic growth in a country, so many people's incomes
production expansion [40]. Then, high public consumption increase, and the availability of raw materials is abundant,
and export will impact increasing aggregate demand, which resulting in a decrease in poverty due to the ability of people
must be responded to by increasing output through investment to meet their daily needs [51]. Then, increasing consumption
by investors [41]. Furthermore, poverty, unemployment, and indicates increased purchasing power and people's welfare so
income inequality will cause people's purchasing power to that poverty is reduced [52].
decrease so that the demand for goods produced will also Furthermore, government investment and spending will
decrease, which does not stimulate investors to expand new contribute as a solution to overcoming poverty because they
industries [42]. contribute as a source of increasing people's welfare [53].
High export will generate income for a country, in which
2.4 Government spending foreign exchange reserves will increase so that a country's
capital capability to overcome domestic problems such as
Government spending is needed in the economy when the poverty will be better [54]. In addition, unemployment and
economy is not moving. In this case, fiscal stimulus is a income inequality will exacerbate poverty due to a decrease in
determinant of economic growth. If this is done, of course, it people's welfare, making it increasingly difficult for people to
will have a positive impact on various other macroeconomic meet their standard of living [55].
variables [19-21]. Previous studies on government spending
have been carried out by various researchers, in which they 2.7 Unemployment
associated it with various macroeconomic variables, including
high economic growth, which would indicate that high state Unemployment is a disease in the economy. One of the
revenues from the total output produced so that government goals of development in various countries is to reduce
spending also increased due to an increase in demand for unemployment. This can be done by encouraging investment
government services from service recipient communities [43]. and suppressing existing inflation. This condition can also be
Then, public consumption, which has increased, will impact done with more expansive government spending [13-17].
increasing government spending to meet subsidy payments or Previous studies on unemployment have been carried out by
direct assistance to various groups of people [44]. Furthermore, various researchers, in which they associated it with various
high investment and export require the government to spend macroeconomic variables, including increased economic
on improving infrastructure services [45]. Apart from that, growth and investment, which will increase output, in which
poverty, unemployment, and income inequality also require there will be an increase in demand for labor to support the
the government to increase its large spending budget to production of goods and services so that unemployment will
implement programs to improve people's welfare through decrease [56]. Then, increased consumption and export will
expanding employment opportunities [46]. demand producers to produce more output to achieve these
conditions, there will be an increase in job opportunities
2.5 Export which will impact low unemployment [57]. Furthermore,
government expenditure is very important to overcome
Export can encourage economic growth and improve relatively serious unemployment because this measure will
exchange rate positions [9-12]. Increased export will increase increase national income and the level of employment [58].
the demand for domestic currency increases. This condition Meanwhile, poverty and income inequality will reduce the
certainly has implications for improving exchange rates community's work productivity due to their low welfare,
against foreign currencies. Previous studies on export have which will trigger unemployment [59].
been carried out by various researchers, in which they linked
it to various macroeconomic variables, including high 2.8 Income inequality
economic growth in a country, indicating that the level of
output it produces is also high so that this condition has the Equal income distribution is one of the development ideals,
opportunity to export to other countries [47]. Then, an increase especially in developing countries. The equitable distribution
in public consumption was responded to by an expansion in of income reflects the quality of existing development. This
investment and government spending, resulting in spending can be achieved with economic growth, investment, and
aimed at increasing or maintaining stocks of capital goods in government spending, which are also evenly distributed in

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various regions. Previous studies on income inequality have Central Bureau of Statistics (BPS) and Bank Indonesia (BI).
been carried out by various researchers, in which they linked Furthermore, the data analysis technique applied in this study
it to various macroeconomic variables, including economic is Panel Vector Autoregressive (PVAR), so that the form of
growth, increased consumption, and export will allow for the VAR model equation in this study is summarized in Eqns.
expansion of production andinput demand for labor will also (1)-(8).
increase, so that people's incomes will increase [60]. Then, Eq. (1) shows that economic growth is influenced by
government investment and spending are instruments to economic growth in the previous period, consumption,
overcome the problem of unequal income distribution because investment, government spending, export, poverty,
they provide increased employment opportunities for the unemployment and income inequality. Eq. (2) shows that
communityin overcoming the problem of income inequality consumption is influenced by economic growth, consumption
[61]. Furthermore, poverty and unemployment cause obstacles in the previous period, investment, government spending,
in increasing the total income and per capita income of the export, poverty, unemployment and income inequality. Eq. (3)
population in the economic structure of a country, so equal shows that investment is influenced by economic growth,
distribution of people's income isdifficult to achieve [62]. consumption, investment in the previous period, government
The relationship between these variables can be seen in the spending, export, poverty, unemployment and income
research conceptualframework in Figure 2. inequality. Eq. (4) shows that government spending is
influenced by economic growth, consumption, investment,
government spending in the previous period, export, poverty,
unemployment and income inequality. Eq. (5) shows that
export is influenced by economic growth, consumption,
investment, government spending, export in the previous
period, poverty, unemployment and income inequality. Eq. (6)
shows that poverty is influenced by economic growth,
consumption, investment, government spending, export,
poverty in the previous period, unemployment and income
inequality. Eq. (7) shows that unemployment is influenced by
Figure 2. Research conseptual framework economic growth, consumption, investment, government
spending, export, poverty, unemployment in the previous
period and income inequality. Eq. (8) shows that income
3. RESEARCH METHODS inequality is affected by economic growth, consumption,
investment, government spending, export, poverty,
The data in this study is secondary data with panel data type. unemployment and income inequality in the previous period.
The time series being analyzed is during 2015-2021. Furthermore, the preparation of the VAR model in this study
Meanwhile, the cross sections analyzed were 34 provinces in includes several stages, which consist of:
Indonesia. Sources of data in this study were obtained from the

Yt = α01i + ∑ni=1 β01i Yt−i + ∑ni=1 θ01i Kt−i + ∑ni=1 λ01i It−i + ∑ni=1 ω01i Gt−i + ∑ni=1 ϑ01i Xt−i + (1)
∑ni=1 γ01i Pt−i + ∑ni=1 δ01i Ut−i + ∑ni=1 τ01i IQt−i + ε01t

K t = α02i + ∑ni=1 β02i Yt−i + ∑ni=1 θ02i Kt−i + ∑ni=1 λ02i It−i + ∑ni=1 ω02i Gt−i + ∑ni=1 ϑ02i Xt−i + (2)
∑ni=1 γ02i Pt−i + ∑ni=1 δ02i Ut−i + ∑ni=1 τ02i IQt−i + ε02t

It = α03i + ∑ni=1 β03i Yt−i + ∑ni=1 θ03i Kt−i + ∑ni=1 λ03i It−i + ∑ni=1 ω03i Gt−i + ∑ni=1 ϑ03i Xt−i + (3)
∑ni=1 γ03i Pt−i + ∑ni=1 δ03i Ut−i + ∑ni=1 τ03i IQt−i + ε03t

Gt = α04i + ∑ni=1 β04i Yt−i + ∑ni=1 θ04i Kt−i + ∑ni=1 λ04i It−i + ∑ni=1 ω04i Gt−i + ∑ni=1 ϑ04i Xt−i + (4)
∑ni=1 γ04i Pt−i + ∑ni=1 δ04i Ut−i + ∑ni=1 τ04i IQt−i + ε04t

Xt = α05i + ∑ni=1 β05i Yt−i + ∑ni=1 θ05i Kt−i + ∑ni=1 λ05i It−i + ∑ni=1 ω05i Gt−i + ∑ni=1 ϑ05i Xt−i + (5)
∑ni=1 γ05i Pt−i + ∑ni=1 δ05i Ut−i + ∑ni=1 τ05i IQt−i + ε05t

P = α06i + ∑ni=1 β06i Yt−i + ∑ni=1 θ06i Kt−i + ∑ni=1 λ06i It−i + ∑ni=1 ω06i Gt−i + ∑ni=1 ϑ06i Xt−i + (6)
∑ni=1 γ06i Pt−i + ∑ni=1 δ06i Ut−i + ∑ni=1 τ06i IQt−i + ε06t

Ut = α07i + ∑ni=1 β07i Yt−i + ∑ni=1 θ07i Kt−i + ∑ni=1 λ07i It−i + ∑ni=1 ω07i Gt−i + ∑ni=1 ϑ07i Xt−i + (7)
∑ni=1 γ07i Pt−i + ∑ni=1 δ07i Ut−i + ∑ni=1 τ07i IQt−i + ε07t

IQt = α08i + ∑ni=1 β08i Yt−i + ∑ni=1 θ08i Kt−i + ∑ni=1 λ08i It−i + ∑ni=1 ω08i Gt−i + ∑ni=1 ϑ08i Xt−i + (8)
∑ni=1 γ08i Pt−i + ∑ni=1 δ08i Ut−i + ∑ni=1 τ08i IQt−i + ε08t

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3.1 Stationary test compares the calculated Trace Statistic value with a critical
value at α=5% or α=1%. If the Trace Statistic value is smaller
In conducting research, stationary data is an important than the critical value, it can be concluded that there is no
prerequisite, especially if the data in the study uses relatively cointegration between the two variables in question.
long series because it can produce pseudo/false regression. the
data stationarity test can support an explanation of the 3.6 Impulse response function (IRF)
behavior of a data or model based on certain economic theories
because it can identify pseudo-regressors. The method used in Tracing the effect of shock experienced by a variable on the
this stationarity test is the unit root test or also known as the value of all variables at this time and in several future periods
Augmented Dickey-Fuller (ADF) test. The value of the test is called the Impulse Response Function (IRF) technique. The
results with ADF is indicated by the statistical value of t on the shock given is usually one standard deviation of the variable.
regression coefficient of the observed variable. If the ADF Basically, Impulse Response describes the path where a
value is greater than the MacKinnon critical values test at the variable will return to its balance after experiencing a shock
α=1%, α=5%, or α=10% level, then the data is stationary. To from another variable.
make non-stationary data stationary simply can be done by
differentiating. At the first level of differentiation, the data is 3.7 Forecast error variance decomposition (FEVD)
usually stationary. After re-running the unit root test, and the
data that was originally not stationary has been stationary in Forecast Error Decomposition Variance (FEDV) aims to
the first differentiation, the data is ready for further processing. predict the contribution of the percentage variance of each
In the VAR model it is required to use the same degree of variable due to changes in certain variables in the VAR system.
integration, so that if there is data that is not stationary at the Thus, FEDV analysis is used to estimate the error variance of
level, then the overall data used is first difference data. a variable, namely how big the difference is between the
variance before and after the shock, both the shock originating
3.2 Optimal lag test from oneself and the shock from other variables. FEDV which
is often also referred to as the Cholesky Decomposition, which
As a consequence of using dynamic models with periodic aims to separate the impact of each error individually on the
data, the effects of unit changes in explanatory variables are response received by a variable.
felt over a number of time periods. In other words, the effect
of a change in an explanatory variable may only be felt after a
certain period (time lag). In conducting the analysis, the thing 4. RESULTS AND DISCUSSION
that must be done is to determine the lag. Determination of the
optimal lag can be determined using several criteria, namely: 4.1 Stationary test
LR (Likelihood Ratio), AIC (Akaike Information Criterion),
SC (Schwarz Information Criterion), FPE (Final Prediction A data set is said to be stationary if stochastically the data
Error), and HQ (Hannan-Quinn Information Criterion). Based shows a constant pattern from time to time. Testing the
on calculations for each criterion, the optimal lag is marked stationarity of the data on panel data is necessary because if
with an * (star). the panel data is directly analyzed without testing for
stationarity, it will produce spurious results because these
3.3 Stability test variables often contain unit roots. Data with a stationary level
indicates that the data will move and fluctuate around the
In testing stability, the AR Roots Table can be used. The middle value and be constant from time to time.
stability condition can be seen from the inverse roots value of
the characteristic polynomial value, which can be seen from Table 1. Stationary Test results of variables economic
the modulus value below the AR-roots table. If the modulus growth, consumption, investment, government spending,
values are all below one, then the system is called stable. export, poverty rate, unemployment rate and income
inequality in Indonesia at the level
3.4 Causality test
Levin, Lin & Chu t
Variable Name Conclusion
The causality test is intended to determine which variable Probability
occurs first, or in other words this test is intended to find out Economic Growth (Y) 1.0000 Stationary
that of the two related variables, which variable causes the Consumption (K) 0.9296 Stationary
Investment (I) 0.0000 Stationary
other variable to change. Among the several existing tests, the
Government Spending (G) 0.0000 Stationary
Granger causality test is the most popular method. This test Export (X) 0.0000 Stationary
can indicate whether a variable has a two-way relationship or Poverty (P) 0.0000 Stationary
only one way. Unemployment (U) 0.0000 Stationary
Income Inequality (IQ) 0.0000 Stationary
3.5 Cointegration test
The method used to determine whether the variables in this
In variables that are not stationary, but then become study are indicated to be stationary or not is the Dickey-Fuller
stationary after differentiation, cointegration is likely to occur (DF) unit root test. The test is named because it was developed
or there is a long-term relationship between the two. The by David Dickey and Wayne Fuller. A variable data is said to
cointegration test is intended to determine the behavior of the be stationary (H0 is rejected or Ha is accepted) if the value of
data, whether it has a long-term relationship. There are several the statistical test is less than the critical value or, at the same
ways to test cointegration, including the Johansen test, which time, the probability value of the variable is less than α= 0.05.

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Conversely, variable datais said to be non-stationary (H0 is for overcoming the impact of autocorrelation in the VAR
accepted or Ha is rejected) if the value of the statistical test is system. In addition, selecting the optimal lag length is useful
greater than the critical value or, at the same time, the to show how long a variable responds to other variables. To
probability value of the variable is greater than α=0.05, determine the optimal size of the lag (lag length criteria) can
however, if a variable data is categorized as non-stationary be done using several criteria, including Likelihood Ratio
data. (LR), Final Prediction Error (FPE), Akaike Information
Table 1 presents the results of stationary tests on investment, Criteria (AIC), Schwarz Information Criterion (SIC), and
government spending, export, poverty rate, unemployment Hannan Quinn Information Criterion (HQ). From several
rate, and income inequality. The table shows that the criteria for determining the optimal lag, the criteria chosen in
probability value of Levin, Lin & Chu t* variable investment, this study is the AIC method. The AIC method is used because
government spending, export, poverty rate, unemployment in general manystudies use this method. In fact, all criteria can
rate, and income inequality are less than 0.05. Thus, all be used as long as they are consistent. The smallest AIC value
variables in this study can be said to be average, variance and will be marked with an asterisk.
autocovariance constant values from time to time. Table 2 shows that the lag test results are optimal for the
shock response analysis model for Indonesia's
4.2 Optimal lag test macroeconomic variables. From the table, it can be seen that
the smallest. AIC value (marked with an asterisk) is at lag
The selection of the optimal lag length is crucial in the VAR 2. Therefore, the result of the optimal lag testchosen in this
system because the selection of the optimal lag length is useful study is the smallest AIC value at lag 2.

Table 2. Optimal lag test results variable shock response analysis model Indonesian macroeconomics

Lag Log(R) LR FPE AIC SC HQ

0 -17339.09 NA 5.9e+78 204.0834 204.2309 204.1433
1 -16333.93 1903.878 9.21e+73 193.0110 194.3391* 193.5499
2 -16210.05 222.9960* 4.5e+73* 194.8151 194.8151 193.3244*

4.3 Stability test 4.4 Causality test

The stability of the VAR system can be determined from the The causality test in this study used the Granger Causality
inverse roots value of the AR polynomial characteristic or the test. This test, in essence, can indicate whether a variable has
modulus value in the AR-nominal table. The stability test is a two-way relationship or only one way. For example, if the
carried out by calculating the roots of the polynomial function, probability value is small than α=0.05 (t-statistic is greater
known as the roots of the characteristic polynomial. If all AR- than t-table), then Ho is rejected, or Ha is accepted, which
root modulus values are below 1, then the VAR system is means that endogenous variable 1 affects endogenous variable
categorized as stable. Meanwhile, when all the AR-roots 2. Vice versa, if the probability value is small than α=0.05 (the
modulus values are above 1, the VAR system is categorized as statistic is greater than the t-table), then Ho is rejected, or Ha
unstable. A stable VAR system will produce a valid IRF and is accepted, which means that endogenous variable 2
FEVD analysis. However, otherwise, a stable VAR system influences endogenous variable 1. Based on this, it can be said
will produce valid IRF and FEVD analysis. that endogenous variables 1 and 2 have a two-way relationship
Table 3 shows the results of the VAR stability test on this or causality.
model. The table shows that one modulus value is above 1. Table 4 shows the results of the causality test in this model.
Thus, it can be said that this model's VAR system is unstable The table shows that the variables that have a two-way or
VAR. A stable VAR will result in an invalid or precise IRF causal relationship are P to X and U to P. This result is shown
and FEVD analysis. by the probability value of P to X, which is less than 0.05.
Poverty will require the government to increase its large
Table 3. VAR stability test results variable shock response spending budget to implement programs to improve people's
analysis model Indonesian macroeconomics welfare so that the government is more oriented towards the
domestic market than foreign markets. On the other hand,
Root Modulus export activities will increase a country's reserves so that a
0.981251 0.981251 country's capital in overcoming domestic problems such as
0.940432 – 0.089868i 0.944716 poverty will be better [50, 54].
0.940432 + 0.089868i 0.944716 Furthermore, the probability value of U to P is also less than
0.857843 0.857843
0.05. Unemployment will decrease people's welfare, making it
0.154098 – 0.588785i 0.608617
0.154098 + 0.588785i 0.608617
increasingly difficult for people to meet their standard of
-0.602460 0.602460 living. On the other hand, poverty will reduce labor
0.587610 0.587610 productivity, triggering unemployment [55, 59].
-0.410394 – 0.256112i 0.483753 Then, poverty and export have a causal relationship, which
-0.410394 + 0.256112i 0.483753 is in line with research conducted by Yang and Greaney [32],
0.144752 – 0.353499i 0.381988 that poverty and export influence each other for countries with
0.144752 + 0.353499i 0.381988 open economic systems.The link between poverty and export
-0.328899 – 0.194127i 0.381916 is that high poverty is synonymous with low purchasing power
-0.328899 + 0.194127i 0.381916 for the people. It will result in a decrease in output in a country
-0.039799 0.039799
due to low total aggregate demand, which will have an impact

1356
on decreasing the number of goods and services that will be K does not Granger Cause U 2.59885 0.0774
sold to foreign markets. On the other hand, high export will
generate income for a country in the form of an increase in IQ does not Granger Cause K 170 1.76008 0.1752
foreign exchange, so that a country's ability to overcome social K does not Granger Cause IQ 0.96041 0.3849
problems in driving the economy will be better. Furthermore,
poverty affects consumption, which findings align with G does not Granger Cause I 170 6.95717 0.0013
research conducted by Popescu [28], that high poverty will I does not Granger Cause G 0.25089 0.7784
reduce consumption. The link between poverty and
consumption is that poverty is synonymous with the inability X does not Granger Cause I 170 23.6402 9.E-10
of a person to meet their basic needs due to low purchasing I does not Granger Cause X 3.74679 0.0256
power, so the aggregate demand for consumption has
decreased. Then, poverty affects investment, which findings P does not Granger Cause I 170 5.47695 0.0050
are in line with research conducted by Sims and Wolff [40], I does not Granger Cause P 0.08484 0.9187
that high poverty will reduce investment. The link between
poverty and investment is that high poverty will reduce U does not Granger Cause I 170 7.85594 0.0006
investor interest in investing activities because people's I does not Granger Cause U 2.52597 0.0831
purchasing power in that country is low, so it will impact the
low profits they will get. In addition, poverty affects IQ does not Granger Cause I 170 1.65133 0.1949
I does not Granger Cause IQ 0.14486 0.8653
government spending, which aligns with research conducted
by Baker and Yannelis [35], that high poverty will increase
X does not Granger Cause G 170 24.0436 7.E-10
government spending. The link between poverty and
G does not Granger Cause X 0.64756 0.5246
government expenditure is that high poverty will require the
government to increase the budget to implement poverty
P does not Granger Cause G 170 6.21926 0.0025
alleviation programs.
G does not Granger Cause P 0.03987 0.9609
Table 4. Result of causality test model of variable shock
U does not Granger Cause G 170 14.4354 2.E-06
response analysis Indonesian macroeconomics G does not Granger Cause U 2.67112 0.0722

IQ does not Granger Cause G 170 2.10133 0.1256

Null Hypothesis: Obs F-Statistic Prob. G does not Granger Cause IQ 1.94878 0.1457

K does not Granger Cause Y 170 0.58620 0.5576 P does not Granger Cause X 170 3.81167 0.0241
Y does not Granger Cause K 4.03481 0.0195 X does not Granger Cause P 5.03191 0.0076

I does not Granger Cause Y 170 0.08022 0.9230 U does not Granger Cause X 170 1.16918 0.3132
Y does not Granger Cause I 1.92412 0.1493 X does not Granger Cause U 14.0497 2.E-06

G does not Granger Cause Y 170 1.16870 0.3133 IQ does not Granger Cause X 170 0.23774 0.7887
Y does not Granger Cause G 2.56757 0.0798 X does not Granger Cause IQ 0.93894 0.3931

X does not Granger Cause Y 170 0.54759 0.5794 U does not Granger Cause P 170 5.60585 0.0044
Y does not Granger Cause X 0.42333 0.6556 P does not Granger Cause U 4.42267 0.0135

P does not Granger Cause Y 170 0.82637 0.4394 IQ does not Granger Cause P 170 0.24746 0.7811
Y does not Granger Cause P 3.95576 0.0210 P does not Granger Cause IQ 1.04684 0.3534

U does not Granger Cause Y 170 0.16427 0.8487 IQ does not Granger Cause U 170 0.16598 0.8472
Y does not Granger Cause U 0.57667 0.5629 U does not Granger Cause IQ 0.35595 0.7010

IQ does not Granger Cause Y 170 1.39451 0.2509

Y does not Granger Cause IQ 1.08124 0.3416
Meanwhile, unemployment and poverty have a causal
relationship, which is in line with research conducted by
I does not Granger Cause K 170 0.05276 0.9486
Sunde [48], that unemployment and poverty affect each other
K does not Granger Cause I 13.8685 3.E-06
in developing countries. The link between unemployment and
poverty is that high unemployment will reduce people's
G does not Granger Cause K 170 0.27408 0.7606
income, which will lead to lower people's ability to meet their
K does not Granger Cause G 2.47758 0.0871
standard of living, thus triggering poverty. On the other hand,
X does not Granger Cause K 170 12.9086 6.E-06
high poverty will increase unemployment in a country due to
K does not Granger Cause X 2.13367 0.1217
low productivity of human resources in that country, so this
condition will trigger a shift in production from labor-
P does not Granger Cause K 170 6.86825 0.0014 intensive to capital-intensive so that unemployment conditions
K does not Granger Cause P 0.31412 0.7309 will increase. Furthermore, unemployment and investment
have a causal relationship, which is in line with research
U does not Granger Cause K 170 13.0851 5.E-06 conducted by Obinna [10], that unemployment and investment

1357
have a close relationship for developing countries. The link expanded employment opportunities to overcome
between unemployment and investment is that high unemployment, such as providing credit to encourage MSMEs.
unemployment will reduce the interest of investors to expand Investment affects export, which findings are in line with
their business in a country because of the low per capita research conducted by Kaplanoglou and Rapanos [39], that
income of the people, which will have an impact on the low investment is an important factor in increasing export in a
profits they willget. On the other hand, the high investment country. The link between investment and export is that an
will reduce unemployment due to increased job opportunities, increase in investment will encourage production expansion or
so it will absorb the labor force that is looking for work, and excess supply in a country so that the output produced will
unemployment will decrease. For the other variables, no two- increase. This condition not only meets domestic needs but
way relationship was found, but several variables had a one- also can meet the needs of foreign markets.
way relationship.
Economic growth affects consumption, and findings are in 4.5 Cointegration test
line with research conducted by Afzal et al. [13], which that
economic growth is the main component for determining the To determine whether the variables and models used show
level of consumption in a country. The link between economic long-term issues, one of the methods used is the cointegration
growth and consumption is that high economic growth will test. Cointegration is a long-term relationship between
also produce high total output, which is supported by the large variables; although individually not stationary, the linear
production carried out by economic actors to boost the combination between these variables can become stationary.
economy so that this condition will encourage public The existence of a cointegration relationship in a system of
consumption. Furthermore, economic growth affects equations indicates that in that system, there is an error
government spending [25], which that economic growth is a correction model that consistently describes dynamics in the
source of capital to determine the level of government short term with the long-term relationship. This study's
spending in a country. The link between economic growth and cointegration test is based on the Trace Statistic and
government expenditure is that high economic growth Eigenvalue values. If the Trace Statisticalvalue is greater
indicates that state revenues increase, so capital for than 0.05 and the Eigenvalue is, then the model is cointegrated.
government spending will also increase. Then, economic
growth affects poverty, which findings align with research Table 5. Results variable shock response analysis model
conducted by Hicham [11], which that unstable economic Indonesian macroeconomics
growth will tend to trigger poverty. The link between
economic growth and poverty is that low economic growth Hypothesized Trace 0.05
indicates low income in a country because there is no No. of CE(s) Eigenvalue Statistic Critical Value Prob.**
expansion of economic activity, which results in low social None * 0.652575 376.5679 159.5297 0.0000
welfare and high poverty. At most 1 * 0.610680 232.7879 125.6154 0.0000
At most 2 * 0.314133 104.4917 95.75366 0.0109
Consumption affects government spending, and findings
At most 3 0.233230 53.21003 69.81889 0.4960
are in line with research conducted by İşleyen et al. [9] that At most 4 0.073622 17.09267 47.85613 0.9988
consumption determines government spending in a country. At most 5 0.040482 6.692372 29.79707 0.9995
The link between consumption and government spending is At most 6 0.007273 1.072250 15.49471 0.9999
that high consumption will require the government to increase At most 7 0.000585 0.079534 3.841466 0.7779
the state budget to facilitate high aggregate demand.
Furthermore, consumption affects poverty, and these findings Table 5 shows the cointegration test results on the shock
are in line with research conducted by Aimon et al. [14], in response analysis model for Indonesia's macroeconomic
which consumption is an indicator of poverty. The link variables. In the table, it can be seen that there is a Statistical
between consumption and poverty is that low consumption Trace value that is smaller than the Eigenvalue, so it can be
indicates low people's purchasing power. Hence, a series of said that this model is not cointegrated. This means that this
economic activities experience a decline, such as production model will be estimated using the VAR model.
shrinkage, which will have an impacton poverty.
Government spending affects investment, and findings are 4.6 Impulse response function (IRF)
in line with research conducted by Kurniadi [7], that
government spending is an important factor in attracting IRF is used to see the effect of shock from a variable on
investors to a country. The link between government spending other variables. The estimation for this IRF is focused on the
and investment is that government spending allocated to response of a variable to a one standard deviation change from
increase the quantity and quality of infrastructure is a strategy the variable itself or other variables contained in the VAR
to attract investors. Furthermore, government spending affects model. The vertical axis shows the standard deviation value,
export, which is in line with research conducted by Karim et which measures how much a variable's response will be given
al. [33], that government spending is essential in encouraging if there is a shock to other variables. Meanwhile, the horizontal
export in a country. The link between government spending axis shows the length of the period (years) of the response
and investment is that increasing government spending will given to the shock. The response above the horizontal axis
increase output to meet domestic needs and expand market shows that shock will have a positive effect. Conversely, if
share abroad in a country. Then, government spending affects the response given is below the horizontal axis, it indicates that
unemployment, which findings are in line with research shock will have a negative effect.
conducted by Husin [26], that government spending is an Figure 3 shows the consumption response as a result of an
important factor in overcoming unemployment in a country. economic growth shock. The shock from economic growth
The link between government spending and unemployment is was responded to by consumption which initially tended to
that government spending is the main instrument in providing decline in period 2 and improved further in period 3.

1358
Meanwhile, periods 3 and 5 reached a balance point. However, Figure 5 shows the response to government spending as a
after the 6th period, the downward response becomes deeper result of an economic growth shock. The shock from economic
and further away from the equilibrium point. These results growth was responded to by government spending, which
indicate that the consumption response resulting from a shock initially tended to decrease in the 4th period and responded
to economic growth is not permanent because the consumption with an increase in the 5th period, before decreasing in the 6th
response line moves toward the equilibrium line. period. Meanwhile, the 8th period reached a balance point.
Figure 4 shows the investment response as a result of an These results indicate that the response to government
economic growth shock. The shock from economic growth spending resulting from a shock to economic growth is not
was responded to by investment which initially tended to permanent because the response line moves towards the
decline in the 2nd period and towards the balance line in the 3rd balance line.
to 4th period. Meanwhile, the 6th period tended to decline until Figure 6 shows the export response as a result of an
the 7th period before reaching a balance point in the 8th period. economic growth shock. The shock from economic growth
This shows that the investment response resulting from a was responded to by export initially tending to decline in the
shock to economic growth is not permanent because the 4th period, and responded with an increase in the 5 th period,
investment response line moves toward the balance line. before declining in the 6th period. In addition, the 7th period
reached a balance point, and the 8th period again declined
before finally reaching the balance point in the 10th period.
These results indicate that the export response as a result of an
economic growth shock is not permanent because the response
line moves toward the balance line.
Figure 7 shows the response to the poverty rate as a result
of an economic growth shock. The shock from economic
growth was responded to by the poverty rate, which initially
decreased not too deep in period 2 and tended to level off in
periods 4, 6, and 8. These results indicate that the poverty rate
response was not moving towards a balance point and was
getting further away. The shock from economic growth is
permanent because the response line moves away from the
balance line.
Figure 3. IRF results of consumption response due to Figure 8 shows the response to the unemployment rate as a
economic growth shock result of an economic growth shock. The shock from economic
growth was responded to by the unemployment rate initially
dropping deep in period 1, and tending to increase in period 2.
In periods 6 and 8 it moved with aflat response before reaching
a decline in period 10. These results show that the
unemployment rate response is not toward the balance point
and is getting further away. The shock fromeconomic growth
is permanent because the response line moves away from the
balance line.
Figure 9 shows the income inequality response as a result of
an economic growth shock. The shock from economic growth
was responded to by income inequality, initially at a balance
point in period 2, then decreased in period 3. After that, periods
4 and 5 reached a balance point, although they moved slightly
towards an increase, likewise in periods 8 and 10 reached a
Figure 4. IRF results of investment response due to balance point. These results indicate that the income inequality
economic growth shock response is not permanent because the response line moves
toward the equilibrium line.

Figure 5. IRF results of government expenditure response Figure 6. IRF results of export response due to economic
due to shock economic growth growth shock

1359
 4.7 Forecast error variance decomposition (FEVD)

Forecast error variance decomposition (FEVD) is an

analysis that provides information regarding the dynamic
relationship between endogenous and endogenous variables in
a dynamic VAR system. FEVD is a shock from the factors that
affect certain variables' variability (fluctuation) to other
variables, which are carried out orthogonally. FEVD is carried
out to seewhat percentage of the role each shock plays in the
variability of certain variables or examines the sources of
fluctuations in certain variables. Thus, it can be known with
certainty the factors that influence the fluctuation of a variable
on other variables. Moreover, these factors are policy
Figure 7. IRF results of poverty-level response due to shock implications that play an important role in the stability of these
economic growth variables.
Table 6 shows the results of the FEVD model of Indonesia's
macroeconomic variable shock response analysis. The table
shows that the variability of consumption in the short term
can be explained by the shock of economic growth of 0.00%
and in the long term of 11.60%. Investment variability in the
short term is explained by the economic growth shock of
0.00%;in the long term, it decreases to 1.85%. The variability
of government spending in the short term can be explained by
the shock of economic growth of 0.00% and in the long term
of 0.96%. Export variability in the short term is explained by
the economic growth shock of 0.00%; in the long term, it
decreases to 9.28%. The variability of the poverty rate in the
short term can be explained by the shock of economic growth
Figure 8. IRF results of unemployment rate due to shock
of 0.00% and in the long term of 2.79%. The variability of the
economic growth
unemployment rate in the short term is explained by the
economic growth shock of 0.00%, and in the long term, it
decreases to 7.64%. Finally, the variability of income
inequality in the short term is explained by the economic
growth shock of 0.00%, and in the long term, it decreases to
0.32%.
From the results of the FEVD, it can be concluded that
economic growth has the greatest long-term impact on
consumption, export, and the unemployment rate. These
results prove that in the long run, economic growth can
positively impact increasing consumption, export and
reducing the unemployment rate. In addition, the short-term
impact will be minimal, such as investment, government
spending, the poverty rate, and income inequality. These
Figure 9. IRF results of income inequality response due to results prove that economic growth can still not impact these
economic growth shock variables significantly, so it takes time in the long term to have
a more optimal impact.

Table 6. FEVD results of variable shock response analysis Indonesian macroeconomics

Variance Decomposition of PE:

Period S.E. Y K I G X P U IQ
1 4.378235 100.0000 0.000000 0.000000 0.000000 0.000000 0.000000 0.000000 0.000000
2 4.956648 88.53971 7.738778 0.327838 0.001958 0.022297 0.924494 1.757171 0.687749
3 5.477767 76.85029 14.08079 0.463487 0.946401 1.955197 2.809184 2.330250 0.564401
4 6.012726 74.41335 13.60792 1.198160 0.799188 1.655634 3.199482 4.631522 0.494741
5 6.533003 74.04293 11.61285 1.332666 0.777601 3.709387 3.021030 5.077525 0.426011
6 6.827491 73.13890 11.25438 1.744681 0.824366 3.425781 3.261646 5.948903 0.401345
7 7.293664 70.28646 9.863935 1.870372 0.860389 6.598993 3.436349 6.703633 0.379868
8 7.750947 69.31212 10.79521 1.688179 0.833447 6.814422 3.170377 7.049688 0.336561
9 8.097860 67.87282 10.17339 1.550615 0.929231 8.024421 3.100746 7.979450 0.369327
10 8.629491 65.52596 11.60178 1.853937 0.968682 9.285008 2.790878 7.648217 0.325545

1360
5. CONCLUSIONS consider exogenous variables and can also apply an error
correction model (ECM) approach that does not only analyze
Based on the results of the research and discussion, it can long-term balances but also for the short term.
be concluded that there are several variables that have a causal
relationship. Firstly, there is a causal relationship between
unemployment and export, as well as between unemployment ACKNOWLEDGMENT
and poverty. Secondly, there is also a causal relationship
between poverty and export. Thirdly, there is a bidirectional The authors would like to thank Lembaga Penelitian dan
causal relationship between unemployment and poverty. Pengabdian Masyarakat Universitas Negeri Padang for
Furthermore, several variables have a one-way relationship, funding this work with a contract number:
including economic growth affecting consumption, 785/UN35.13/LT/2022.
consumption affecting government spending, government
spending affecting investment, and investment affecting
export. REFERENCES
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