WERE AGGREGATE DEMAND SHOCKS IMPORTANT IN EXPLAINING INDONESIAN MACROECONOMIC FLUCTUATIONS?

Hermanto Siregar and Bert D. Ward

Journal of the Asia Pacific Economy, 2002, vol. 7, issue 1, 35-60

Abstract: This paper assesses the importance of aggregate demand shocks in the Indonesian macroeconomy using a variant of the Mundell-Fleming model analysed with the structural VAR methodology. Short-run relations are identified with contemporaneous restrictions, whereas long-run relations are embedded in a long-run money demand equation and a policy reaction function. Estimation results are generally plausible and consistent with small open economy theory. Results from the model provide empirical evidence on the relative importance of aggregate demand shocks over aggregate supply shocks in affecting macroeconomic fluctuations. The implication of this finding on monetary and fiscal policies is formulated.

Date: 2002
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DOI: 10.1080/13547860120110461

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