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Understanding monetary and fiscal policy rule interactions in Indonesia

Author

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  • Solikin M. Juhro
  • Paresh Kumar Narayan
  • Bernard Njindan Iyke

Abstract

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

Suggested Citation

  • Solikin M. Juhro & Paresh Kumar Narayan & Bernard Njindan Iyke, 2022. "Understanding monetary and fiscal policy rule interactions in Indonesia," Applied Economics, Taylor & Francis Journals, vol. 54(45), pages 5190-5208, September.
    • Handle: RePEc:taf:applec:v:54:y:2022:i:45:p:5190-5208
    DOI: 10.1080/00036846.2022.2041180
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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.

    More about this item

    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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