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Understanding Monetary And Fiscal Policy Rule Interactions In Indonesia

Author

Listed:
  • Solikin M. Juhro

    (Bank Indonesia)

  • Paresh K. Narayan

    (APAEA)

  • Bernard N. Iyke

    (APAEA)

Abstract

We examine the interaction of monetary and fiscal policies in Indonesia over a period of 1974Q2 to 2019Q1. Within a standard structural vector autoregression (SVAR) framework, we show that the reaction of the policy rules is quite consistent with theoretical predictions. For instance, a contractionary monetary policy is trailed by a contractionary fiscal policy of lower government expenditure. We extend the analysis to evaluate the interaction of the policy rules during active and passive regimes. We show that monetary and fiscal policies are not synchronized over the full sample period, suggesting presence of structural and institutional rigidities, particularly in the past. Restricting the sample to a recent time period, we find the policies to be harmonized to some extent owing to recent joint policy coordination initiatives by the monetary and fiscal authorities.

Suggested Citation

  • Solikin M. Juhro & Paresh K. Narayan & Bernard N. Iyke, 2019. "Understanding Monetary And Fiscal Policy Rule Interactions In Indonesia," Working Papers WP/01/2019, Bank Indonesia.
    • Handle: RePEc:idn:wpaper:wp012019
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Solikin M. Juhro & Bernard Njindan Iyke, 2019. "Forecasting Indonesian Inflation Within An Inflation-Targeting Framework: Do Large-Scale Models Pay Off?," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 22(4), pages 423-436, December.
    3. Solikin M. Juhro & Denny Lie & Atet Rizki Wijoseno & Mohammad Aly Fikry, 2022. "Fiscal Policy Stance, Central Bank Digital Currency, And The Optimal Monetary-Macroprudential Policy Mix," Working Papers WP/01/2022, Bank Indonesia.

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    More about this item

    Keywords

    Fiscal Policy; Monetary Policy; Policy Interactions; Indonesia;
    All these keywords.

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • 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

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