THE CONTRIBUTION OF EXTERNAL DEBT AND FISCAL DEFICIT TO INFLATION IN INDONESIA

This study aims to empirically examine the simultaneous effects of external debt and fiscal deficit on inflation in Indonesia using time series data from 1994 to 2023. The background of this research is the tendency of developing countries to face inflationary pressures not only from monetary factors but also from fiscal policies and reliance on external financing. The novelty of this study lies in its integrative approach that combines two strategic fiscal variables within a single empirical model an approach that is rarely examined simultaneously in the context of Indonesia. The method employed is Ordinary Least Squares (OLS) regression with robust standard errors and the Johansen cointegration test to identify long-term relationships among variables. The results indicate that external debt has a positive and significant effect on inflation, while the fiscal deficit is statistically insignificant. These findings suggest that inflationary pressures in Indonesia are more dominantly influenced by external factors rather than domestic fiscal deficits. Therefore, prudent management of external debt and a synergy between fiscal and monetary policies are crucial to maintaining price stability in the long run.