Monetary and fiscal policy mix connectivity towards the business cycle in Indonesia

Regina Niken Wilantari,Imro'Atul Husna Afriani

doi:10.22437/ppd.v9i2.11489

Abstract

This research is based on the magnitude of the influence of monetary and fiscal aspects, namely the money supply, exchange rates, government spending, and taxes on the business cycle in Indonesia. This study aims to examine the effect of the connection between the monetary and fiscal policy mix on the business cycle in Indonesia. For analysis purposes, secondary data was used in the form of time-series data from 1970–2017. The method used is the Vector Error Correction Model (VECM) to see long-term and short-term relationships. In the estimation results, it is found that in the long-term period, the monetary variables (money supply and exchange rates) and fiscal variables (government expenditures and taxes) have a significant positive effect on the business cycle in Indonesia.In contrast, the monetary variables that have a significant effect in the short-term period are only the amount variable money supply. There are no fiscal variables that have a significant effect on the business cycle in Indonesia. The interaction of monetary and fiscal policies is still effectively implemented in Indonesia.

Highlights

A country is experiencing steady growth or increasing every year, and this situation indirectly describes the development of various economic sectors that occur
This study includes the relationship between the variable money supply, exchange rate, taxes, and government spending to determine the policy mix interaction between monetary policy and fiscal policy on the business cycle
Vector Error Correction Model (VECM) estimation starts from determining the optimum lag in the VECM model

Summary

Introduction

A country is experiencing steady growth or increasing every year, and this situation indirectly describes the development of various economic sectors that occur. This is inseparable from an important indicator that is the success of the development process in the long term. Economic growth is an indicator of a country that can facilitate more goods and services to the community (Villanthenkodath & Mahalik, 2021; Harnphattananusorn & Puttitanun, 2021) This capability is certainly supported by massive technological developments as well as the necessary institutional and ideological adjustments. Economic growth tends to increase workers' productivity, and the business unit scale can increase. The fluctuation of economic growth can be seen from GDP

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