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A Dynamic Stochastic General Equilibrium (DSGE) Model to Assess the Impact of Structural Reforms on the Indonesian Economy

Author

Listed:
  • Sahminan

    (Bank Indonesia)

  • Ginanjar Utama

    (Bank Indonesia)

  • Robbi Nur Rakhman

    (Bank Indonesia)

Abstract

One of the Government programs to spur economic growth is to improve the availability and quality of infrastructure through increased government spending on infrastructure development. In this paper, we build a DSGE model for a small open economy to predict the impact of government spending on output and welfare in Indonesia. The DSGE model uses parameters in line with the characteristics of Indonesian economy. The simulation results show that in the short run a 1% increase in government spending on consumption and investment could potentially increase economic growth by 0.04% and 0.05%, respectively. Output multiplier of government spending on consumption is estimated at 0.03, much lower than output multiplier of the government spending on investment at 0.20. The simulation results also show that government spending on investment leads to welfare improvement with welfare multiplier at 0.05. On the other hand, an increase in government spending on consumption would lead to a decline in welfare with a multiplier of -0.001.

Suggested Citation

  • Sahminan & Ginanjar Utama & Robbi Nur Rakhman, 2017. "A Dynamic Stochastic General Equilibrium (DSGE) Model to Assess the Impact of Structural Reforms on the Indonesian Economy," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 20(2), pages 1-32, October.
    • Handle: RePEc:idn:journl:v:20:y:2017:i:2x:p:1-32
    DOI: 10.21098/bemp.v20i2.810
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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. Lie, Denny, 2021. "Implications of state-dependent pricing for DSGE model-based policy analysis in Indonesia," Economic Analysis and Policy, Elsevier, vol. 71(C), pages 532-552.
    3. Zams, Bastian Muzbar, 2021. "Frictions and empirical fit in a DSGE model for Indonesia," Economic Modelling, Elsevier, vol. 99(C).
    4. Wei, Wei & Zhang, Wan-Li & Wen, Jun & Wang, Jun-Sheng, 2020. "TFP growth in Chinese cities: The role of factor-intensity and industrial agglomeration," Economic Modelling, Elsevier, vol. 91(C), pages 534-549.
    5. Denny Lie, 2019. "Observed Inflation‐target Adjustments in an Estimated DSGE Model for Indonesia: Do They Matter for Aggregate Fluctuations?," Economic Papers, The Economic Society of Australia, vol. 38(4), pages 261-285, December.
    6. Van Nguyen, Phuong, 2020. "The Vietnamese business cycle in an estimated small open economy New Keynesian DSGE model," Dynare Working Papers 56, CEPREMAP.

    More about this item

    Keywords

    fiscal policy; DSGE; output multiplier; welfare mulipler;
    All these keywords.

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models

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