Financial Market Development on Economic Growth in Indonesia Using Principal Component Regression Analysis

M Yunus, Budi Setiawan, Priya Rani Bhagat, Adil Saleem


This study investigates the relationship between macroeconomic variables and financial market development on economic growth in Indonesia using principal component analysis. A quantitative data was collected from World Bank dataset from 2002 to 2019. Data were analysed using statistical software R. Findings reveal principal component analysis is better than multiple linear regression in explaining the correlation among independent and dependent variables. This study also reveals stock traded of total value as percentage of GDP has the biggest effect on the performance on Indonesian economy during research period. In contrast, unemployment has the smallest impact on economic growth in Indonesia. The results assist in understanding the importance of macroeconomic variables and financial market development on the performance of Indonesian economy.


Financil Market Development; Macroeconomics Variables; Economic Growt; Principal Component;

Full Text:



Abugamea, G. H. (2018). Determinants of Unemployment : Empirical Evidence from Palestine. In Munich Personal RePEc Archive.

Adams, R. H. (2004). Economic Growth, Inequality and Poverty: Estimating the Growth Elasticity of Poverty. World Development, 32(12), 1989–2014.

Aghion, P., & Howitt, P. (1994). Growth and unemployment. Review of Economic Studies, 61(3).

Ahmad, R., Etudaiye-Muhtar, O. F., Matemilola, B. T., & Bany-Ariffin, A. N. (2016). Financial market development, global financial crisis and economic growth: evidence from developing nations. Portuguese Economic Journal, 15(3).

Alfaro, L., Chanda, A., Kalemli-Ozcan, S., & Sayek, S. (2010). Does foreign direct investment promote growth? Exploring the role of financial markets on linkages. Journal of Development Economics, 91(2).

Arestis, P., Demetriades, P. O., & Luintel, K. B. (2001). Financial Development and Economic Growth: The Role of Stock Markets. Journal of Money, Credit and Banking, 33(1).

Boyd, J., & Smith, B. (1996). The coevolution of the real and financial sectors in the growth process. World Bank Economic Review, 10(2).

Demirguc-Kunt, A., & Levine, R. (1996). Stock market development and financial intermediaries: stylized facts. World Bank Economic Review, 10(2).

Demirguc-Kunt, Asli. (1992). Developing Country Capital Structures and Emerging Stock Markets. In Policy Research Working Papers.

Draper, N. R., & Smith, H. (2014). Applied Regression Analysis, 3rd Edition. In John Wiley & Sons.

Du, D., Lew, A. A., & Ng, P. T. (2016). Tourism and Economic Growth. Journal of Travel Research, 55(4).

Edison, H. J., Levine, R., Ricci, L., & Sløk, T. (2002). International financial integration and economic growth. Journal of International Money and Finance, 21(6).

El-Galfy, A., & Khiyar, K. A. (2012). Islamic banking and economic growth: A review. Journal of Applied Business Research, 28(5), 943–956.

Erdal, L., & Göçer, İ. (2015). The Effects of Foreign Direct Investment on R&D and Innovations: Panel Data Analysis for Developing Asian Countries. Procedia - Social and Behavioral Sciences, 195.

Fischer, S. (1991). Growth, Macroeconomics, and Development. NBER Macroeconomics Annual, 6.

Foster, J. (2011). Evolutionary macroeconomics: A research agenda. Journal of Evolutionary Economics, 21(1).

Galbis, V. (1977). Financial Intermediation and Economic Growth in Less-Developed Countries: A Theoretical Approach. The Journal of Development Studies, 13(2).

Gherghina, Ş. C., Simionescu, L. N., & Hudea, O. S. (2019). Exploring foreign direct investment-economic growth nexus-Empirical evidence from Central and Eastern European countries. Sustainability (Switzerland), 11(19).

Gillman, M., & Harris, M. N. (2010). The effect of inflation on growth. Economics of Transition, 18(4).

Greenwood, J., & Jovanovic, B. (1990). Financial Development, Growth, and the Distribution of Income. Journal of Political Economy, 98(5, Part 1).

Gylfason, T., & Herbertsson, T. T. (2001). Does inflation matter for growth? Japan and the World Economy, 13(4).

Hastie, T., Tibshirani, R., & Friedman, J. (2009). Springer Series in Statistics The Elements of Statistical Learning - Data Mining, Inference, and Prediction. In Springer (Vol. 2nd).

Hawksworth, J., & Chan, D. (2015). The World in 2050: Will the shift in global economic power continue ? PwC Analysis, February.

Islam, M. A., Khan, M. A., Popp, J., Sroka, W., & Oláh, J. (2020). Financial development and foreign direct investment-the moderating role of quality institutions. Sustainability (Switzerland), 12(9).

King, R. G., & Levine, R. (1993). Finance, entrepreneurship, and growth Theory and evidence*. In Journal of Monetary Economics (Vol. 32).

Levine, R. (1996). Stock markets: a spur to economic growth. Finance and Development, 33(1).

Levine, Ross. (1997). Financial Development and Economic Growth: Views and Agenda. Journal of Economic Literature, 35(2).

Long, N. T. (2020). Do Foreign Direct Investment, Energy Consumption and Urbanization Enhance Economic Growth in Six ASEAN Countries?*. Journal of Asian Finance, Economics and Business, 7(12).

Mattjik, A. ., & Sumertajaya, I. M. (2006). Perancangan percobaan dengan aplikasi SAS dan MINITAB. In Perancangan percobaan dengan aplikasi SAS dan MINITAB.

Mauro, P. (2003). Stock returns and output growth in emerging and advanced economies. Journal of Development Economics, 71(1).

Morck, R., Wolfenzon, D., & Yeung, B. (2005). Corporate Governance, Economic Entrenchment, and Growth. Journal of Economic Literature, 43(3), 655–720.

Myers, R. J., & Thompson, S. R. (1989). Generalized Optimal Hedge Ratio Estimation. American Journal of Agricultural Economics, 71(4).

Oberman, R., Dobbs, R., Budiman, A., Thompson, F., & Rosse, M. (2012). The archipelago Economy: Unleashing Indonesia’s potential. In McKinsey Global Institute (Issue September 2012).

Öztürk, S., Sözdemir, A., & Ülger, Ö. (2014). The Effects of Inflation Targeting Strategy on the Growing Performance of Developed and Developing Countries: Evaluation of Pre and Post Stages of Global Financial Crisis. Procedia - Social and Behavioral Sciences, 109.

Pelinescu, E. (2015). The Impact of Human Capital on Economic Growth. Procedia Economics and Finance, 22, 184–190.

Rabah, A., & Thorvaldur, G. (2011). Chapter 2 Commodity Price Volatility, Democracy, and Economic Growth. In O. de La Grandville (Ed.), Economic Growth and Development (Vol. 11, pp. 9–24). Emerald Group Publishing Limited.

Saleem, A., & Ashfaque, M. (2020). An Analysis of Profitability Determinants of Islamic Banks: Empirical Study of Malaysia vs Pakistan. International Journal of Business Reflections, 1(2), 135–157.

Şiklar, İ., & Kocaman, M. (2018). FDI and Macroeconomic Stability: The Turkish Case. European Financial and Accounting Journal, 13(1).

Supranto, J. (2004). Analisis multivariat : Arti dan Interpretasi. In Analisis multivariat : arti dan interpretasi.

Szkorupová, Z. (2015). Relationship between Foreign Direct Investment and Domestic Investment in Selected Countries of Central and Eastern Europe. Procedia Economics and Finance, 23.

Tiago, C. V. D. V, Mohaddes, K., & Raissi, M. (2015). Commodity Price Volatility and the Sources of Growth. Journal of Applied Econometrics, 30(6), 857–873.

Van Nieuwerburgh, S., Buelens, F., & Cuyvers, L. (2006). Stock market development and economic growth in Belgium. Explorations in Economic History, 43(1).

Wait, C., Ruzive, T., & le Roux, P. (2017). The Influence of Financial Market Development on Economic Growth in BRICS Countries. International Journal of Management and Economics, 53(1).

Weil, D. N., Weil, D. N., Foster, A., Friedberg, R., Genesove, D., Sohn, B., & Boston, T. (2005). Accounting for the Effect of Health on Economic Growth. NBER Working Paper 11455.

World Bank. (2020). GDP Growth (annual %). Retrieved online from (accessed on 14 December 2021)

World Bank. (2021). World Bank Open Data. Retrieved online from (accessed on 11 October 2021)


Article Metrics

 Abstract Views : 548 times
 PDF Downloaded : 11 times


  • There are currently no refbacks.

Copyright (c) 2022 Budi Setiawan, M Yunus

Jurnal Akuntansi dan Keuangan (JAK)

ISSN 2301-4717