Abstract
This study examines the fiscal and monetary policy in Indonesia using the Mundell-Fleming model. The main objective of this study was to determine which policies are effective between fiscal and monetary policies of the national income in Indonesia because Indonesia is a small open economy with not perfect capital mobility. The analysis technique used is Two Stage Least Square (TSLS) by using secondary data base on International Financial Statistics, 2000.I 2014.II . The research result is monetary policy is more effective than the fiscal policy in which monetary policy multiplier at 0.0028 greater than fiscal policy multiplier 0.001316. The results are consistent with the theory of the Mundell-Fleming.
Highlights
The issued policy can be fiscal policy and monetary policy
On the other hand, is a country of small, open economy where there is a difference between domestic and foreign interest rates, and this sometimes makes the capital flow in an unexpected way. This is the contradictory point regarding whether or not this Mundell-Fleming model could work in Indonesia, i.e. monetary policy is more effective than fiscal policysince some assumptions are not as what the model requires
Teguh Santoso's research results confirm Mundell-Fleming’shypothesis that monetary policy is more effective than fiscal policy
Summary
By observing the financial crisis that rapidly spreads and defeats the monetary sector, monetary policy may be more effective than fiscal policy. This is in line with the opinion of Mundell and Fleming. Mundell-Fleming’s theory is to study and analyze economic phenomena, there is a need to use any models. Macro-economic model which can be used to analyze the fiscal and monetary policies which work in an open economy is Mundell Fleming model. The model is called the IS-LM-BP (Makin, 2002). It explains short fluctuation in GDP, exchange rate, consumption, investment, government spending, net exports and enters international capital flows
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