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A Dynamic Stochastic General Equilibrium (DSGE) Model to Assess the Impact of Structural Reforms on the Indonesian Economy

Author

Listed:
  • Sahminan

    (Bank Indonesia)

  • Ginanjar Utama

    (Bank Indonesia)

  • Robbi Nur Rakhman

    (Bank Indonesia)

Abstract

One of the Government programs to spur economic growth is to improve the availability and quality of infrastructure through increased government spending on infrastructure development. In this paper, we build a DSGE model for a small open economy to predict the impact of government spending on output and welfare in Indonesia. The DSGE model uses parameters in line with the characteristics of Indonesian economy. The simulation results show that in the short run a 1% increase in government spending on consumption and investment could potentially increase economic growth by 0.04% and 0.05%, respectively. Output multiplier of government spending on consumption is estimated at 0.03, much lower than output multiplier of the government spending on investment at 0.20. The simulation results also show that government spending on investment leads to welfare improvement with welfare multiplier at 0.05. On the other hand, an increase in government spending on consumption would lead to a decline in welfare with a multiplier of -0.001.

Suggested Citation

  • Sahminan & Ginanjar Utama & Robbi Nur Rakhman, 2017. "A Dynamic Stochastic General Equilibrium (DSGE) Model to Assess the Impact of Structural Reforms on the Indonesian Economy," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 20(2), pages 149-180, October.
    • Handle: RePEc:idn:journl:v:20:y:2017:i:2x:p:149-180
    DOI: 10.21098/bemp.v20i2.810
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    References listed on IDEAS

    as
    1. Obstfeld, M., 1998. "Risk and Exchange Rate," Papers 193, Princeton, Woodrow Wilson School - Public and International Affairs.
    2. Jasmin Sin, 2016. "The Fiscal Multiplier in Small Open Economy: The Role of Liquidity Frictions," IMF Working Papers 2016/138, International Monetary Fund.
    3. Tang, Hsiao Chink & Liu, Philip & Cheung, Eddie C., 2013. "Changing impact of fiscal policy on selected ASEAN countries," Journal of Asian Economics, Elsevier, vol. 24(C), pages 103-116.
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    More about this item

    Keywords

    fiscal policy; DSGE; output multiplier; welfare mulipler;
    All these keywords.

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models

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