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Rethinking Indonesia's Public Debt in the Era of Negative Interest Rate-Growth Differentials

Published: July 24, 2025 | arXiv ID: 2507.18092v1

By: Mervin Goklas Hamonangan

Potential Business Impact:

High debt makes countries riskier, not safer.

Plain English Summary

Governments can borrow money more cheaply than they used to, which might seem like a good deal. However, this research shows that for countries like Indonesia, borrowing too much can actually make their economy unstable and riskier. This means that while borrowing might seem like an easy solution, it could lead to bigger problems down the road, so governments need to be very careful about how much debt they take on.

This study contributes to the discussion about how higher public debt may not be costly because of the negative interest rate-growth differentials by simulating OLG models introduced by Blanchard (2019) under uncertainty, showing debt and welfare dynamics in two scenarios: intergenerational transfers and debt rollovers in the case of Indonesia. The simulation is done by modifying the model parameters based on interest rate-growth differentials historic data from 2004-2019. It is found that the fiscal consensus does not hold when implementing Blanchard (2019) analysis with Indonesian-based rate parameters. Increasing public debt makes the economy more volatile and high risk. Modifying other factors supports the initial finding, with lower initial endowment diminishing the benefits of public debt and higher capital share under Cobb-Douglas. When the threat of debt explosion appears, efforts to reduce debt share will reduce the welfare of the society. The policy implication is to be careful of the opportunity. Increasing public debt may not be the way to go, avoiding possible dire consequences.