This study aims to analyze the relationship between macroeconomic variables in Indonesia, namely GDP with money supply, exchange rate of rupiah to US Dollar, exports, imports and interest rates. The background problem is to analyze the best method to influence government targets or policies on economic growth by studying the relationship of macroeconomic variables. Previous studies analyzing the relationship between macroeconomic variables in Indonesia have used multiple linear regression analysis. Using VECM analysis we can find out the short-term and long-term effects on the relationship between macroeconomic variables in Indonesia. The analysis used in this study is the Vector Error Correction Model with Maximum Likelihood estimation. Based on the result, the cointegration test found that there is a long-term relationship. Based on the VECM model (3), in the short term there is a relationship between macroeconomic variables and in the long run there is a long-term causality relationship in the GDP and export models. It is expected that the Government and the Central Bank will work together cooperatively in making policies to keep control of the money supply, exchange rate of rupiah to US Dollar and interest rates to enable to stimulate the economy.

Overparameterization is the amount of data used in the study is less than the number of estimated parameters. Overparameterization problems can cause the forecasting ability to be weak because the model is not suitable. This problem often occurs in complex models such as Vector Error Correction Model (VECM). This study discusses VECM and Bayesian VECM (BVECM), which aims to analyze the relationship between macroeconomic variables in Indonesia. First, estimate parameters of VECM with Maximum Likelihood Estimation. Second, estimate parameters of VECM with a Bayesian approach (BVECM). The variables used in this study are six macroeconomic variables in Indonesia in 2010 quarter 1 to 2019 quarter 4 are GDP, the money supply, exchange rate of rupiah to US dollar, exports, imports and interest rates. The amount of data in this study is less than the number of estimated parameters that causing overparameterization problems. Based on literature, Bayesian method can avoid overparameterization problems which can not be overcome by Maximum Likelihood Estimation. The model obtained from this study is the VECM(3) and BVECM(3). In the VECM analysis, the residuals did not meet the assumptions of diagnostic model. However, diagnostics of BVECM models show that it has been proven that the model is suitable. This conclusion is relevant to the statement that the Bayesian method can solve the problem of overparameterization.

This study uses Bayesian approach to estimate Vector Error Correction Model (VECM). The aims of this study is to analyze the relationship between macroeconomic variables in Indonesia. To analyze the best method to influence government targets or policies on economic growth by studying the relationships of many macroeconomic variables. Previous studies in analyzing the relationship between macroeconomic variables with VECM analysis, using the Maximum Likelihood Estimation. However this estimation method cannot solve the problem of overparameterization in VECM model. The variables used in this study are six macroeconomic variables in Indonesia in 2010 quarter 1 to 2019 quarter 4 are GDP, the money supply, exchange rate of rupiah to US dollar, exports, imports and interest rates. The number of data in this study is less than the number of estimated parameters causing overparameterization problems. Therefore, this study uses the Bayesian parameter estimation method to avoid overparameterization problems in economic data. The model obtained from this study is the BVECM(3) and it has been proven that the model is suitable (the model diagnostic test). Based on the parameter estimation results of BVECM(3), the significant variables affecting GDP are GDP itself, the money supply, exchange rate of rupiah to US Dollar, exports, imports and the interest rate for Bank Indonesia Certificates. In addition, there is a two-way relationship that affects each other, namely the relationship between GDP and the money supply, exports and imports, exports and interest rates, and between imports and interest rates.