Macroeconomic and institutional determinants of financial development in Indonesia: a Fourier ARDL approach

This study examines the macroeconomic and institutional determinants of financial development in Indonesia by employing the Fourier Autoregressive Distributed Lag approach. The methodology is chosen to account for mixed integration orders and smooth structural shifts that characterize emerging economies. In the long run, government effectiveness and interest rates are significant positive drivers of financial development, while economic development, inflation, foreign direct investment, and political stability are not statistically significant. The insignificance of economic development, reflecting Indonesia’s persistent informality and crisis-induced disruptions, instead supports institutional theory, which highlights governance quality as a central determinant of financial deepening. In the short run, inflation, foreign direct investment, interest rate, and government effectiveness exert significant influences, while the Fourier sine and cosine terms confirm the importance of nonlinear dynamics, capturing both immediate shocks and gradual reforms. Meanwhile, the error correction term indicates rapid convergence to the long-run equilibrium. Overall, the findings demonstrate that financial development in Indonesia is shaped less by economic expansion than by institutional strength, macroeconomic management, and structural adjustments. The study concludes that enhancing governance effectiveness, maintaining monetary and price stability, and integrating foreign capital more effectively into domestic markets are critical for sustaining resilient and inclusive financial development.