Why has economic growth slowed down in Indonesia? An investigation into the Indonesian business cycle using an estimated DSGE model

Abstract

Economic growth in Indonesia has been trending down from about 6.5% in 2010 to less than 5% recently. Calibrating and estimating a dynamic stochastic general equilibrium (DSGE) model of Indonesia, we show that most of Indonesia’s growth over the last decade has been driven by supply factors, especially rising multi-factor productivity (MFP) as Indonesia reaped the benefits of post-Asian-crisis structural reforms. The pace of multi-factor productivity growth has slowed since 2010, however, a decelerating trend reinforced by slower world growth. A series of interest rate cuts has successfully managed to offset some of those headwinds. However, absent further structural reforms to revive productivity growth, supportive monetary policy will not be sufficient to sustain long-term growth and poses inflation risks.