The Role Of Fiscal Stimulus And Monetary Easing In Indonesian Economy During Global Financial Crisis: Financial Computable General Equilibrium Approach

Iskandar Simorangkir () and Justina Adamanti ()
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Iskandar Simorangkir: Bank Indonesia
Justina Adamanti: Bank Indonesia

Bulletin of Monetary Economics and Banking, 2010, vol. 13, issue 2, 165-186

Abstract: Global financial crisis started in mid 2008 has reduced global economic growth, and many countries even experienced economic contraction. To deal with economic contraction, various economic policies have been undertaken. Governments have increased fiscal stimulus through increasing expenditure and lowering tax while central banks have cut policy rates substantially. In some countries interest rates even reach zero or close to zero. Similar to many other countries, Indonesia has also undertaken expansionary policies, namely increasing fiscal stimulus and lowering interest rates. This paper examines the impacts of fiscal stimulus and interest rate cut on Indonesian economy using financial computable general equilibrium (FCGE) approach. The estimation results show a number of findings. First, the combination of fiscal expansion and monetary expansion boosts economic growth of Indonesia effectively. Relative to the effectiveness of fiscal expansion without monetary policy expansion or monetary expansion without fiscal expansion, the combination of those two policies is more effective. Second, looking into the components of GDP, the combination of fiscal and monetary expansion has a large multiplier effect, boosting aggregate demand through increasing consumption, investment, government expenditure, exports and imports. Meanwhile, from production side, the combination of fiscal and monetary expansion has positive effects on increasing production of all economic sectors. This effect comes from fiscal incentive (lower tax, lower import duties, etc) in increasing investment. Moreover, the increase in aggregate demand also encourages enterprises to increase their production. Third, institutionally fiscal stimulus and monetary easing has increased income and purchasing power of the poor and rich households in rural and urban area. This increase in turn results in higher all household consumption.

Keywords: Fiscal stimulus; monetary easing; financial computable general equilibrium; global financial crisis (search for similar items in EconPapers)
JEL-codes: D58 E12 E13 E52 E58 H25 H31 H53 H54 (search for similar items in EconPapers)
Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:idn:journl:v:13:y:2010:i:2f:p:165-186

DOI: 10.21098/bemp.v13i2.389

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