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A nexus between fiscal policy and inflation: a case study of Indonesia using SVAR model

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  • Julie Ann Q. Basconcillo

    (Fakultas Ekonomi dan Bisnis, Universitas Airlangga, Kampus B, Surabaya, Indonesia)

Abstract

This paper investigates the dynamic effects of changes in three different government spending components - public sector wages and purchase of goods and services, energy and other subsidies, and transfers to households - on inflation and private consumption in Indonesia from 2001:Q1 to 2022:Q4, using a non-recursive structural VAR model. The model consists of eight endogenous variables: exchange rate, output gap, tax ratio, government spending, inflation, debt ratio, interest rate, and private consumption. Structural decompositions reveal that inflation responses differ across the three government spending components. Shocks to government subsidies are more likely to lead to higher inflation than shocks to other components. But even spending on subsidies does not always have a statistically significant effect on inflation. Surprisingly, government spending shocks - aggregate or by components - do not seem to have a statistically significant impact on private consumption. The main effect of fiscal expansions may thus be a deterioration in public finances.

Suggested Citation

  • Julie Ann Q. Basconcillo, 2023. "A nexus between fiscal policy and inflation: a case study of Indonesia using SVAR model," Public Sector Economics, Institute of Public Finance, vol. 47(4), pages 477-503.
    • Handle: RePEc:ipf:psejou:v:47:y:2023:i:4:p:477-503
    DOI: 10.3326/pse.47.4.5
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    More about this item

    Keywords

    fiscal policy; government spending; structural VAR; inflation; Indonesia;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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