The Effect of Money Supply and Government Expenditure Shock in Indonesia: Symmetric or Asymmetric?
AbstractIt has been more then four years since the economic crisis in Indonesia. While other Asian countries such as South Korea and Malaysia have shown significant improvement, Indonesia seems to have the slowest economic recovery process. In order to deal with the economic crisis, the government has imposed several policies, both monetary and fiscal. This paper tries to achieve two objectives; first, it tries to determine the existence of an asymmetric reaction of output and inflation to government expenditures and the money supply, and second, it tries to find the best policy to deal with the economic crisis, i.e., to determine which policy generates a larger and quicker response to output. It contains an overview of government expenditures and the money supply in the pre-crisis year, theoretical background and data analysis. The results of the study show that a shock in government expenditures has a significant effect on changes in output, and that the effect is asymmetric (positive shock has a larger impact than negative shock), while a money supply shock does not have a statistically significant effect on output. The paper concludes with three important government policy implications. First, the government must reallocate its spending, i.e. allocate more to development expenditures which will increase the productive capacity. Second, since Indonesia currently has a huge debt burden, it is not necessary for the government to increase its expenditures, since the effect on output reduction is not statistically significant. Third, the monetary authority should not use a shock in money supply to boost output, but it should focus on its function in delivering a low level of inflation.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University in its series International Center for Public Policy Working Paper Series, at AYSPS, GSU with number paper0218.
Length: 37 pages
Date of creation: 01 Oct 2002
Date of revision:
Contact details of provider:
Web page: http://aysps.gsu.edu/isp/index.html
indonesia; government expenditures;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-10-20 (All new papers)
- NEP-MAC-2003-10-20 (Macroeconomics)
- NEP-SEA-2003-10-20 (South East Asia)
You can help add them by filling out this form.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Paul Benson).
If references are entirely missing, you can add them using this form.