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The Impact of Fiscal Policy on the Output And Inflation

Author

Listed:
  • Ndari Surjaningsih

    (Bank Indonesia)

  • G. A. Diah Utari

    (Bank Indonesia)

  • Budi Trisnanto

    (Bank Indonesia)

Abstract

This study examines the impact of fiscal policy on output and inflation, along with a look at discretionary fiscal policy and how it impacts the volatility of output and inflation. Model Vector Error Correction Model (VECM) was applied over quarterly data, covering the period 1990 to 2009. Empirical results showed that there is a co integration relationship between government spending and taxes with respect to output in the long-run. Unlike government spending, in the long-term, taxation has a positive effect on economic growth. Short-term adjustment suggests that an increase in government spending has a positive effect on output, while a tax increase has a negative effect. There is a greater influence of government spending on output in the short term compared to taxation policies. Therefore, government spending is more effective to stimulate economic growth especially in times of recession, compared to taxation policies. While the increase in government spending causes a decrease in inflation, tax increases lead to higher inflation. This study also indicates the absence of discretionary fiscal policy made by the government of Indonesia.

Suggested Citation

  • Ndari Surjaningsih & G. A. Diah Utari & Budi Trisnanto, 2012. "The Impact of Fiscal Policy on the Output And Inflation," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 14(4), pages 1-32, April.
    • Handle: RePEc:idn:journl:v:14:y:2012:i:4g:p:1-32
    DOI: https://doi.org/10.21098/bemp.v14i4.409
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    Citations

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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. Haryo KUNCORO, 2016. "The Credibility Of Fiscal Rules Policy And Business Cycle Volatility," Scientific Annals of Economics and Business (continues Analele Stiintifice), Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 63(2), pages 209-224, July.
    3. Abdulaziz H. Algaeed, 2022. "Government Spending Volatility and Real Economic Growth: Evidence From a Major Oil Producing Country, Saudi Arabia, 1970 to 2018," SAGE Open, , vol. 12(2), pages 21582440221, April.
    4. Binata Rani Sen & Shamim Alam & Md. Maznur Rahman & Mohammad Iqbal Hossain, 2019. "Investigating Impact of Expansionary Fiscal Policy on Output in Bangladesh Economy: An Econometric Study," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 9(8), pages 936-945, August.
    5. Akram, Vaseem & Rath, Badri Narayan, 2020. "What do we know about fiscal sustainability across Indian states?," Economic Modelling, Elsevier, vol. 87(C), pages 307-321.
    6. Akram, Vaseem & Rath, Badri Narayan, 2020. "Optimum government size and economic growth in case of Indian states: Evidence from panel threshold model," Economic Modelling, Elsevier, vol. 88(C), pages 151-162.
    7. Mehrara , Mohsen & Behzadi Soufiani , Mohsen, 2015. "The Threshold Impact of Fiscal and Monetary Policies on Inflation: Threshold Model Approach," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 10(4), pages 1-27, October.

    More about this item

    Keywords

    Inflation; output; fiscal policy; tax; discretionary; VECM;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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