Why fiscal spending and banking credit fail to drive local growth? Evidence from West Kalimantan Province of Indonesia
Why fiscal spending and banking credit fail to drive local growth? Evidence from West Kalimantan Province of Indonesia

Summary/Abstract: This study analyzes the influence of government spending, investment, and bank credit expansion on the Gross Regional Domestic Product (GRDP) in districts/cities of West Kalimantan Province of Indonesia during the 2015–2023 period using the Vector Autoregressive (VAR) approach. This research aims to fill the literature gap regarding the determinants of economic growth at the regional level in Indonesia. The results of the stationarity test showed that all the variables were stationary at the first difference, but the cointegration test did not find a long-term relationship between the variables. The VAR model estimates show that GRDP is significantly influenced by its own historical value, while investment, government spending, and banking credit do not show a significant influence in the short term on economic growth. Impulse response and variance decomposition analyses show that GRDP has a highly autoregressive nature, with external contributions from credit, investment, and government spending relatively small but gradually increasing over time. These findings show that in the short term, government credit and spending have not been the main drivers of regional economic growth. In addition, results show the need for improvement in effectiveness of fiscal allocation & credit expansion policies. This research provides valuable insights into the limitations as well as the potential for increasing the effectiveness of fiscal and monetary policies at the regional level.

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