Sigma Convergence and VECM Approach in Explaining the Relationship among Macro Variables in Indonesia

Abstract

Objective – Inequality of regional income, government expenditure and government revenue can show the performance of these variables in improving the economic and non-economic conditions of each region. Previous literature discusses, in part, the inequality among these three variables. This research fills the gap left by previous research by analyzing the inequality of the three variables and analysing the relationship between them in driving the provincial economy in Kalimantan. The first objective of this study is to analyze the reduction of regional income inequality, government revenue and government expenditure. The second objective is to analyze the relationship among macro variables. Methodology/Technique – Using data from 4 provinces in Kalimantan across a 15-year period (2002-2016), this study concludes that in the short term, only changes of government revenue have an impact on regional income and only changes of government revenue has an impact on government expenditure. Findings - Meanwhile, in the long term, changes in regional income, government revenue, and government expenditure can all have an impact on regional income. Type of Paper: Empirical. Keywords: Inequality; Regional Income; Government Expenditure; Government Revenue. Reference to this paper should be made as follows: Kurniawati, S; Lestari, N. 2019. Sigma Convergence and VECM Approach in Explaining the Relationship among Macro Variables in Indonesia, J. Bus. Econ. Review 4(4) 156 – 162 https://doi.org/10.35609/jber.2019.4.4(2) JEL Classification: H70, E00, E10, O11.