Monetarism or Keynesian Discourse in Indonesia

Lim Chia Yien, Hussin Abdullah and Muhammad Azam

Bulletin of Indonesian Economic Studies, 2019, vol. 55, issue 3, 367-385

Abstract: This paper examines the relative effectiveness of fiscal policy and monetary policy in Indonesia during 1970–2015, using the autoregressive distributed lag (ARDL) bounds testing approach to cointegration and Toda–Yamamoto causality. The ARDL results suggest that there is a long-run equilibrium relationship between monetary policy and economic growth in Indonesia. In the short run, money supply is found to positively affect growth while interest rates negatively affect growth. We conclude that monetary policy is more effective than fiscal policy in both the long and the short run. The causality test reveals bidirectional causality between interest rates and growth. Overall, we find that monetary policy has a more profound impact on growth than fiscal policy. Evidence from the causality test in this study supports the Wagner hypothesis and the fiscal synchronisation hypothesis, and shows that there is coordination between the government and the central bank in Indonesia.

Date: 2019
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DOI: 10.1080/00074918.2019.1576854

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