Does Indonesia Pursue Sustainable Fiscal Policy?
In this paper, I examine the sustainability of Indonesian fiscal policy by looking at how the primary balance-to-GDP ratio has responded to variations of the debt-to-GDP ratio, as suggested by Bohn's (1998) Model Based Sustainability approach. This approach is motivated by dissatisfaction with most of the literature that use unit root and cointegration tests in combination with the intertemporal budget constraint. It is argued that unit root or cointegration tests have low power in rejection unit root from near unit root alternatives. Furthermore, Bohn (2005) shows that the consistency with the intertemporal budget constraint (IBC) is not a sufficient condition for debt stationary. It is possible to satisfy the IBC while simultaneously having a mildly explosive path of debt-to-GDP ratios. Using a data set covering the period 1990 – 2010 and controlling for measures of cyclical variations in GDP and temporary government expenditure, I find a significantly positive response of the primary balance-to-GDP ratio to variations in the debt-to-GDP ratio, and that response has been stable since 2000. Moreover, I also find that the debt-to-GDP ratio tends to be mean-reverting due to a nominal growth dividend. These results suggest that the government have significant and strong fiscal response to changes in debt-to-GDP ratio and that the stability of debt-to-GDP ratio is dependent on the growth rate of the economy.
|Date of creation:||Nov 2015|
|Date of revision:||Nov 2015|
|Contact details of provider:|| Postal: Jalan Cimandiri No.6, Bandung 40115|
Web page: http://ceds.fe.unpad.ac.id
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Peter Wierts, 2007. "The sustainability of euro area debt: a re-assessment," DNB Working Papers 134, Netherlands Central Bank, Research Department.
- Hamilton, James D & Flavin, Marjorie A, 1986.
"On the Limitations of Government Borrowing: A Framework for EmpiricalTesting,"
American Economic Review,
American Economic Association, vol. 76(4), pages 808-819, September.
- James D. Hamilton & Marjorie A. Flavin, 1985. "On the Limitations of Government Borrowing: A Framework for Empirical Testing," NBER Working Papers 1632, National Bureau of Economic Research, Inc.
- Mendoza, Enrique G. & Ostry, Jonathan D., 2008.
"International evidence on fiscal solvency: Is fiscal policy "responsible"?,"
Journal of Monetary Economics,
Elsevier, vol. 55(6), pages 1081-1093, September.
- Enrique G. Mendoza & Jonathan David Ostry, 2007. "International Evidenceon Fiscal Solvency; Is Fiscal Policy "Responsible"?," IMF Working Papers 07/56, International Monetary Fund.
- Enrique G. Mendoza & Jonathan D. Ostry, 2007. "International Evidence on Fiscal Solvency: Is Fiscal Policy "Responsible"?," NBER Working Papers 12947, National Bureau of Economic Research, Inc.
- Barro, Robert J, 1979.
"On the Determination of the Public Debt,"
Journal of Political Economy,
University of Chicago Press, vol. 87(5), pages 940-971, October.
- Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
- Mari PANGESTU, 2003. "The Indonesian Bank Crisis And Restructuring: Lessons And Implications For Other Developing Countries," G-24 Discussion Papers 23, United Nations Conference on Trade and Development.
- Piergallini Alessandro & Postigliola Michele, 2012. "Fiscal Policy and Public Debt Dynamics in Italy, 1861-2009," Rivista italiana degli economisti, Società editrice il Mulino, issue 3, pages 417-440.
- Alessandro Piergallini & Michele Postigliola, 2012. "Fiscal Policy and Public Debt Dynamics in Italy, 1861-2009," CEIS Research Paper 248, Tor Vergata University, CEIS, revised 27 Jul 2012.
- International Monetary Fund, 2010. "Post-Crisis Fiscal Policy Priorities for the ASEAN-5," IMF Working Papers 10/252, International Monetary Fund.
- Wilcox, David W, 1989. "The Sustainability of Government Deficits: Implications of the Present-Value Borrowing Constraint," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(3), pages 291-306, August.
- David W. Wilcox, 1987. "The substainability of government deficits: implications of the present- value borrowing constraint," Working Paper Series / Economic Activity Section 77, Board of Governors of the Federal Reserve System (U.S.).
- Bohn, Henning, 1995. "The Sustainability of Budget Deficits in a Stochastic Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 257-271, February.
- Bohn, H., 1990. "The Sutainability Of Budget Deficits In A Stochastic Economy," Weiss Center Working Papers 6-90, Wharton School - Weiss Center for International Financial Research.
- Jordi Gali & Roberto Perotti, 2003. "Fiscal Policy and Monetary Integration in Europe," NBER Working Papers 9773, National Bureau of Economic Research, Inc.
- Jonathan David Ostry & Abdul d Abiad, 2005. "Primary Surpluses and sustainable Debt Levels in Emerging Market Countries," IMF Policy Discussion Papers 05/6, International Monetary Fund.
- Bettina Fincke & Alfred Greiner, 2010. "Do Governments in Developing Countries Pursue Sustainable Debt Policies? Empirical Evidence for Selected Countries in Africa and Latin America," Journal of Development Studies, Taylor & Francis Journals, vol. 46(4), pages 745-770.
- Quintos, Carmela E, 1995. "Sustainability of the Deficit Process with Structural Shifts," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(4), pages 409-417, October.
- Trehan, Bharat & Walsh, Carl E., 1988. "Common trends, the government's budget constraint, and revenue smoothing," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 425-444.
- Bharat Trehan & Carl E. Walsh, 1987. "Common trends, the government's budget constraint, and revenue smoothing," Working Papers in Applied Economic Theory 87-11, Federal Reserve Bank of San Francisco.
- Diego Valderrama, 2005. "Fiscal sustainability and contingent liabilities from recent credit expansions in South Korea and Thailand," Economic Review, Federal Reserve Bank of San Francisco, pages 29-41. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:unp:wpaper:201504. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Arief Anshory Yusuf)
If references are entirely missing, you can add them using this form.