A Dynamic Stochastic General Equilibrium (DSGE) Model to Assess the Impact of Structural Reforms on the Indonesian Economy

Sahminan Sahminan, Ginanjar Utama () and Robbi Nur Rakhman ()
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Ginanjar Utama: Bank Indonesia
Robbi Nur Rakhman: Bank Indonesia

Bulletin of Monetary Economics and Banking, 2017, vol. 20, issue 2, 149-180

Abstract: One of the Government programs to spur economic growth is to improve the availability and quality of infrastructure through increased government spending on infrastructure development. In this paper, we build a DSGE model for a small open economy to predict the impact of government spending on output and welfare in Indonesia. The DSGE model uses parameters in line with the characteristics of Indonesian economy. The simulation results show that in the short run a 1% increase in government spending on consumption and investment could potentially increase economic growth by 0.04% and 0.05%, respectively. Output multiplier of government spending on consumption is estimated at 0.03, much lower than output multiplier of the government spending on investment at 0.20. The simulation results also show that government spending on investment leads to welfare improvement with welfare multiplier at 0.05. On the other hand, an increase in government spending on consumption would lead to a decline in welfare with a multiplier of -0.001.

Keywords: fiscal policy; DSGE; output multiplier; welfare mulipler (search for similar items in EconPapers)
JEL-codes: C5 E1 (search for similar items in EconPapers)
Date: 2017
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Journal Article: A DYNAMIC STOCHASTIC GENERAL EQUILIBRIUM (DSGE) MODEL TO ASSESS THE IMPACT OF STRUCTURAL REFORMS ON THE INDONESIAN ECONOMY (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:idn:journl:v:20:y:2017:i:2x:p:149-180

DOI: 10.21098/bemp.v20i2.810

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