Does Indonesia Pursue Sustainable Fiscal Policy?
Rudi Kurniawan ()
No 201504, Working Papers in Economics and Development Studies (WoPEDS) from Department of Economics, Padjadjaran University
In this paper, I examine the sustainability of Indonesian fiscal policy by looking at how the primary balance-to-GDP ratio has responded to variations of the debt-to-GDP ratio, as suggested by Bohn's (1998) Model Based Sustainability approach. This approach is motivated by dissatisfaction with most of the literature that use unit root and cointegration tests in combination with the intertemporal budget constraint. It is argued that unit root or cointegration tests have low power in rejection unit root from near unit root alternatives. Furthermore, Bohn (2005) shows that the consistency with the intertemporal budget constraint (IBC) is not a sufficient condition for debt stationary. It is possible to satisfy the IBC while simultaneously having a mildly explosive path of debt-to-GDP ratios. Using a data set covering the period 1990 – 2010 and controlling for measures of cyclical variations in GDP and temporary government expenditure, I find a significantly positive response of the primary balance-to-GDP ratio to variations in the debt-to-GDP ratio, and that response has been stable since 2000. Moreover, I also find that the debt-to-GDP ratio tends to be mean-reverting due to a nominal growth dividend. These results suggest that the government have significant and strong fiscal response to changes in debt-to-GDP ratio and that the stability of debt-to-GDP ratio is dependent on the growth rate of the economy.
Keywords: Fiscal Policy; Indonesia (search for similar items in EconPapers)
JEL-codes: H6 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-sea
Date: 2015-11, Revised 2015-11
References: View references in EconPapers View complete reference list from CitEc
Citations Track citations by RSS feed
Downloads: (external link)
http://ceds.feb.unpad.ac.id/wopeds/201504.pdf First version, 2015 (application/pdf)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:unp:wpaper:201504
Access Statistics for this paper
More papers in Working Papers in Economics and Development Studies (WoPEDS) from Department of Economics, Padjadjaran University Contact information at EDIRC.
Bibliographic data for series maintained by Arief Anshory Yusuf ().