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A nexus between fiscal policy and inflation: a case study of Indonesia using SVAR model
Julie Ann Q. Basconcillo 
Article | Year: 2023 | Pages: 477 - 503 | Volume: 47 | Issue: 4 Received: March 22, 2023 | Accepted: September 27, 2023 | Published online: December 11, 2023
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FULL ARTICLE
FIGURES & DATA
REFERENCES
CROSSMARK POLICY
METRICS
LICENCING
PDF
Source: Author’s calculation based on data from sources indicated in appendix table A1.
Note: The size of the shock is one unit or one percentage point. The solid line refers to the impulse response of the structural decomposition; dashed lines refer to the ± 2 standard error bands. Lag length is 2 across government spending components, except for social protection, where lag length is 3.
|
Variable
|
Definition
|
Source
|
|
Central
government expenditures (CG)
|
Central
government expenditures
|
Ministry
of Finance’s State Revenue and Expenditure Budget (Anggaran Pendapatan dan
Belanja Negara or APBN)
|
|
Government
consumption (GC)
|
Central
government expenditures on employee compensation and use of goods and
services
|
|
Social
protection (SP)
|
Central
government spending on social benefits in the form of transfers of money,
goods or services
|
|
Subsidy
(SUB)
|
Central
government spending on energy and non-energy items
|
|
Exchange
rate (ER)
|
Bilateral
nominal rupiah per US$ exchange rate
|
Bank
Indonesia’s
Indonesian
Economic Financial Statistics (Statistik Ekonomi dan Keuangan Indonesia or
SEKI)
|
|
Debt-to-GDP
ratio (DEBT)
|
Ratio
of central government debt to nominal GDP
|
Indonesian
Public Sector Debt Statistics (Statistik Utang Sektor Publik Indonesia)
|
|
Output
gap (GAP)
|
Difference
between log of real GDP and log of potential GDP
|
Indonesian
Bureau of Statistics (Badan Pusat Statistik or BPS)
|
|
IPI
gap
|
Difference
between log of the real and log of potential total production of large and
medium non-oil manufacturing establishments
|
|
Tax
(TAX)
|
Ratio
of tax revenue to nominal GDP
|
Government
Financial Statistics
|
|
Inflation
rate (INF)
|
First
difference of logarithm of the consumer price index: all itemsb
|
Federal
Reserve Bank of St. Louis
|
|
GDP
deflator
|
First
difference of logarithm of the GDP deflator index: all itemsb
|
|
Interest
rate (INT)
|
Short-term
interest rate based on the BI 7-Day Reverse Repo Rate
|
Bank
Indonesia’s
Indonesian
Economic Financial Statistics (SEKI)
|
|
Investment
lending rate
|
Investment
lending rates of the reporting banks’ branches located in Indonesia
|
|
Private
consumption (PC)
|
Household
consumption expenditures
|
Indonesian
Bureau of Statistics (BPS)
|
bThis definition of inflation rate is the one used for SVAR modeling. The ones shown in the descriptive statistics and graph refer to the published inflation rates.
|
Statistic
|
CGa
|
GCa
|
SUBa
|
SPa
|
TAXa
|
DEBTa
|
GAP
|
INF
|
INT
|
ER
|
PCa
|
|
Mean
|
11.6
|
3.7
|
3.1
|
0.9
|
11.1
|
32.1
|
0.0
|
6.2
|
7.6
|
11,307
|
55.7
|
|
Median
|
11.4
|
3.8
|
2.4
|
1.0
|
11.2
|
29.8
|
0.1
|
5.4
|
7.0
|
10,250
|
54.4
|
|
Max.
|
18.0
|
5.2
|
23.9
|
2.0
|
14.2
|
52.0
|
3.4
|
17.8
|
17.7
|
16,359
|
60.5
|
|
Min.
|
7.5
|
2.4
|
0.0
|
0.0
|
7.7
|
22.6
|
-5.5
|
1.2
|
3.5
|
8,310
|
52.6
|
|
Std. dev.
|
1.97
|
0.62
|
3.02
|
0.36
|
1.39
|
7.93
|
1.22
|
3.63
|
3.36
|
2,367
|
2.20
|
|
Skewness
|
0.56
|
0.08
|
4.19
|
0.01
|
-0.25
|
0.87
|
-0.93
|
1.24
|
1.34
|
0.40
|
0.82
|
|
Kurtosis
|
3.42
|
2.49
|
27.62
|
3.32
|
2.71
|
2.65
|
z.41
|
4.26
|
4.40
|
1.59
|
2.38
|
|
Jarque-Bera
|
5.18
|
1.04
|
2,478
|
0.31
|
1.25
|
10.50
|
83.81
|
28.26
|
33.3
|
9.69
|
11.35
|
|
P-value
|
0.07
|
0.59
|
0.00
|
0.86
|
0.54
|
0.01
|
0.00
|
0.00
|
0.00
|
0.01
|
0.00
|
|
Obs.
|
88
|
88
|
88
|
72
|
88
|
80
|
88
|
88
|
88
|
88
|
88
|
|
Variable
|
ADF t-statistic
|
KPSS (LM-Stat)
|
Status
|
|
|
Ho: series has unit root
|
Ho: series is stationary
|
|
|
|
Intercept only
|
Intercept with
Trend
|
Intercept only
|
Intercept with
Trend
|
|
|
Log
Central government
|
-0.732 (2)
|
|
-4.878 (1)
|
***
|
1.112
|
***
|
0.058
|
|
TS
|
|
Log
Government consumption
|
-1.551 (1)
|
|
-2.725 (1)
|
|
1.162
|
***
|
0.249
|
***
|
|
|
D(Log
Government consumption)
|
-9.709 (1)
|
***
|
-9.767 (1)
|
***
|
0.185
|
|
0.113
|
|
I(1)
|
|
Log
Subsidy
|
-5.169 (1)
|
***
|
-5.270(1)
|
***
|
0.186
|
|
0.167
|
**
|
I(0)
|
|
Log
Social protection
|
-20.745 (0)
|
***
|
-20.931 (0)
|
***
|
0.512
|
**
|
0.119
|
|
I(0)
|
|
As Percent of GDP
|
|
|
|
|
|
|
|
|
|
|
Central
government/GDP
|
-3.850 (1)
|
***
|
-4.315 (1)
|
***
|
0.830
|
***
|
0.117
|
|
I(0)
|
|
Government
consumption/GDP
|
-2.760 (1)
|
*
|
-5.712 (0)
|
***
|
1.080
|
***
|
0.186
|
**
|
|
|
D(Government
consumption/GDP)
|
-14.342
|
***
|
-14.316
|
***
|
0.095
|
|
0.081
|
|
I(1)
|
|
Subsidy/GDP
|
-6.788 (1)
|
***
|
-12.153 (0)
|
***
|
0.862
|
***
|
0.069
|
|
I(0)
|
|
Social
protection/GDP
|
-4.859 (0)
|
***
|
-5.023 (0)
|
***
|
0.219
|
|
0.147
|
**
|
I(0)
|
|
Debt
ratio
|
-1.678 (1)
|
|
-1.248 (1)
|
|
0.356
|
*
|
0.301
|
***
|
|
|
D(Debt
ratio)
|
-5.817 (0)
|
***
|
-7.017 (0)
|
***
|
0.825
|
***
|
0.071
|
|
I(1)
|
|
Tax
ratio
|
-1.979 (2)
|
|
-6.659 (0)
|
***
|
1.179
|
***
|
0.063
|
|
TS
|
|
Log
Exchange rate
|
-0.554 (0)
|
|
-2.915 (0)
|
|
0.995
|
***
|
0.208
|
**
|
|
|
D(Log
Exchange rate)
|
-11.315 (0)
|
***
|
-11.570
|
***
|
0.185
|
|
0.056
|
|
I(1)
|
|
Inflation
rate
|
-6.709 (0)
|
***
|
-8.060 (0)
|
***
|
0.963
|
***
|
0.042
|
|
I(0)
|
|
Interest
rate
|
-3.967 (2)
|
***
|
-5.137 (1)
|
***
|
1.029
|
***
|
0.124
|
*
|
TS
|
|
Output
gap
|
-4.051 (0)
|
***
|
-4.023 (0)
|
**
|
0.038
|
|
0.038
|
|
I(0)
|
|
GDP
growth
|
-3.79 (0)
|
***
|
-3.94 (0)
|
**
|
0.31
|
|
0.15
|
**
|
I(0)
|
|
Log
Private consumption
|
-1.026 (0)
|
|
-0.937 (0)
|
|
1.202
|
***
|
0.184
|
**
|
|
|
D(Log
Private Consumption)
|
-9.988 (0)
|
***
|
-10.046 (0)
|
***
|
0.239
|
|
0.149
|
**
|
I(1)
|
|
Private
Consumption/GDP
|
-1.101 (0)
|
|
-1.585 (0)
|
|
1.066
|
***
|
0.263
|
***
|
|
|
D(Private
Consumption/GDP
|
-8.775 (0)
|
***
|
-8.782 (0)
|
***
|
0.144
|
|
0.097
|
|
I(1)
|
|
IPI
gap
|
-5.603 (0)
|
***
|
-5.570 (0)
|
***
|
0.039
|
|
0.039
|
|
I(0)
|
|
GDP deflator
|
-4.023 (1)
|
***
|
-7.403 (0)
|
***
|
0.659
|
**
|
0.103
|
|
I(0)
|
|
Lending
rate
|
-1.501 (1)
|
|
-4.425 (1)
|
***
|
1.115
|
***
|
0.122
|
*
|
TS
|
***, ** and * denote 1%, 5% and 10% significance levels of null hypothesis rejection, respectively. Values inside parentheses refer to lag lengths based on Schwarz Information Criterion. The KPSS output only provides the asymptotic critical values. TS stands for trend-stationarity.
|
Variable
|
Break Date
|
|
Deterministic Component
|
Status
|
|
Log
Central government
|
|
|
Constant + Trend
|
Level
|
|
Log Government
consumption
|
|
|
Constant
|
FD
|
|
Log
Subsidy
|
2008Q2
|
*
|
Constant
|
Level
|
|
2015Q2
|
*
|
Constant
|
|
|
Log
Social protection
|
|
|
Constant
|
Level
|
|
As Percent of GDP
|
|
|
|
|
|
Central
government/GDP
|
2009Q2
|
*
|
Constant
|
Level
|
|
Government
consumption/GDP
|
|
|
Constant
|
FD
|
|
Subsidy/GDP
|
2015Q2
|
*
|
Constant
|
Level
|
|
Social protection/GDP
|
|
|
Constant
|
Level
|
|
Exchange
rate
|
|
|
Constant
|
FD
|
|
Tax
|
2008Q3
|
|
Constant + Trend
|
Level
|
|
Debt
|
2011Q4
|
*
|
Constant
|
FD
|
|
Output gap
|
2019Q4
|
|
Constant
|
Level
|
|
Inflation
rate
|
2008Q3
|
*
|
Constant
|
Level
|
|
Interest rate
|
2005Q2
|
|
Constant + Trend
|
Level
|
|
2013Q3
|
*
|
|
Log Private
consumption
|
|
|
Constant
|
FD
|
|
Private
consumption/GDP
|
|
|
Constant
|
FD
|
|
IPI gap
|
2019Q4
|
|
Constant
|
Level
|
|
GDP
deflator
|
2008Q3
|
*
|
Constant
|
Level
|
|
Lending rate
|
2014Q1
|
*
|
Constant + Trend
|
Level
|
|
Paired Series
|
Engle-Granger tau-statistic
|
Phillips-Ouliaris tau-statistic
|
Decision
|
|
DEBT
and LER
|
-1.555 (1)
|
-2.342
|
Do not reject null
|
|
DEBT and PCGDP
|
-0.011 (1)
|
-0.633
|
Do not reject null
|
|
LER
and PCGDP (with trend)
|
-3.996 (0)**
|
-4.004**
|
Reject null
|
|
LER and PCGDP (without
trend)
|
-1.801 (0)
|
-1.769
|
Do not reject null
|
|
LER
and LPC
|
-2.771 (0)
|
-2.770
|
Do not reject null
|
Note: The size of shock is one unit or one percentage point. The solid line refers to the impulse response of the structural decomposition; dashed lines refer to the ± 2 standard error bands. Lag length is 2 for central government spending and government consumption spending, lag length for subsidy and social protection spending is 1.
a Definition and sources are shown in table A1.
Note: The size of shock is one unit or one percentage point. The solid line refers to the impulse response
of the structural decomposition; dashed lines refer to the ± 2 standard error bands. Lag length is 2
across government spending instruments, except for social protection, where lag length is 3.
Graph 1Plot of variables DISPLAY Graph
Graph 2Impulse responses to structural VAR innovations in government spending DISPLAY Graph
Table A1Data definitions and sourcesa DISPLAY Table
Table A2Descriptive statistics DISPLAY Table
Table A3Unit root tests DISPLAY Table
Table A4Test for structural breaks DISPLAY Table
Table A5Cointegration test DISPLAY Table
Graph A1Robustness check: Impulse responses to structural VAR innovations in government spending as percentage of GDP DISPLAY Graph
Graph A2Alternative robustness check indicators for some variablesa DISPLAY Graph
Graph A3Robustness check: Impulse responses to structural VAR innovations in government spending (with GDP deflator as indicator for inflation) DISPLAY Graph
* The author would like to thank Rudi Purwono, Unggul Heriqbaldi and the two anonymous reviewers for their very useful comments and suggestions.
1 These rules draw on the European Union’s Stability and Growth Pact.
2 Nominal values are used for both budget deficit rule and public debt rule. Railavo (2004), from whom this rule is adopted, used real values to assess the effects of monetary policy on fiscal variables through the price level.
3 Another option to adjust for trend-stationarity and structural breaks – include deterministic trend and/or dummy directly in the VAR as an exogenous variable – was not used because of the limited sample size.
4 Unlike most literature, which uses real exchange rates, this study follows Juhro, Narayan and Njindan (2022) in using nominal exchange rates. In the case of Indonesia, the real and nominal effective exchange rates of the rupiah follow practically the same trend. Higher government spending increases aggregate demand, which leads the central bank to raise interest rates and thereby strengthens the domestic currency.
5 The alternative variables have also been tested for unit roots, structural breaks, etc.
6 After the GFC, policy coordination initiatives contributed to a better alignment of policies in Indonesia (Juhro, Narayan and Njindan Iyke,  2022).
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|
December, 2023
IV/2023 |
