The Determinants Of Indonesian Business Cycle

This study investigates the business cycle and financial cycle in Indonesia after the economic crisis from the period 2000Q1 - 2018Q3 using several approaches i.e. Turning Point Analysis, Frequency Based Filter, and Composite Leading Indicator (CLI). In addition, this study also analyzes the determinants of the business cycle through Global VAR (GVAR) with 2000 bootstrap replication. The results of the study show that until the third quarter of 2018, Indonesia's business and financial cycles were still in the acceleration phase. Likewise, the financial cycle that is still in an increasing/accelerated pattern is driven by credit growth, which is still quite high. The acceleration phase in the business cycle and the financial cycle of Indonesia in the last few periods shows a more sloping recovery pattern or L-shaped recovery. The results of the variance decomposition indicate that the Indonesian business cycle is influenced both by domestic factors and global factors. In addition to exogenous shock from output, which can be due to productivity, the dominant domestic factor is monetary policy and price competitiveness. Meanwhile, global factors that predominantly influence Indonesia's business cycle are global economic activity and global liquidity conditions. The variations in output that occur in China are the most important for Indonesia's business cycle. Counterfactual analysis shows that if China does not experience rebalancing, the acceleration phase of the Indonesian business cycle will take place stronger with higher growth rates. In addition, because it takes into account indirect global relationships, spillover analysis provides new findings that there are outputs of several countries in Latin America that predominantly influence Indonesia's output.