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Impact of Monetary Policy and Fiscal Policy on Indonesian Stock Market

Rossanto Dwi Handoyo, Mansor Jusoh and Mohd Azlan Shah Zaidi
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Rossanto Dwi Handoyo: Airlangga University, Surabaya, East Java, Indonesia
Mansor Jusoh: National University of Malaysia, Bangi Selangor, Malaysia

Expert Journal of Economics, 2015, vol. 3, issue 2, 113-126

Abstract: This paper attempts to investigate the effect of fiscal and monetary policy on Indonesian Stock price as well as main sectors stock price such as agricultural, mining, manufacture, and financial sector indexes. We consider the world oil price as a foreign variable that will influence domestic economy as in regular small open economy model. In this paper, we employ the Monte Carlo algorithm to Near-SVAR models (If some of the VAR equations have regressors not included in the others). We find that there is a positive stock price response to monetary policy shock both aggregated and sectoral stock price. In term of interaction between fiscal policy shock and stock market, we find that all sectors respond negative relationship. From this empirical finding, fiscal policy crowd out private sector activity in market, thus, its effect will be impotent in economy. We also provide the evidence that not only both policies are able to influence the stock price individually, but also the interaction between monetary and fiscal policy is important in explaining stock market performance.

Keywords: monetary policy; fiscal policy; stock price; monte carlo svar model; impulses response (search for similar items in EconPapers)
JEL-codes: C32 E63 G12 (search for similar items in EconPapers)
Date: 2015
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