IDEAS home Printed from https://ideas.repec.org/a/lpe/efijnl/201606.html
   My bibliography  Save this article

Lowering Regional Inflation? Improve Budget Absorption

Author

Listed:
  • Vid Adrison

    (Graduate Program in Economics, Faculty of Economics and Business Universitas Indonesia & Institute for Economic and Social Research, Faculty of Economics and Business Universitas Indonesia)

  • Masarina Flukeria

    (Statistics Indonesia)

Abstract

The subnational government spending in Indonesia exhibit a highly skewed distribution, i.e., it is very low in the first two-quarters and then increases significantly in the last two-quarters. Such explosive pattern poses two disadvantages. First, the regional output will fall below its optimal level as the low government capital expenditure leads to a fewer provision of public goods. Second, a significant increase in government spending in the later quarter pushes the short run aggregate demand to the northeast and creates an inflationary pressure in the following quarters. In this study, we analyze the effect of quarterly regional government expenditure growth on regional inflation during 2010–2014. Using Arellano Bond GMM estimation, we find government expenditure growth leads to higher inflation in the same quarter. A percentage increase in non-capital expenditure spending results in a higher inflation than a percentage increase in capital spending.

Suggested Citation

  • Vid Adrison & Masarina Flukeria, 2016. "Lowering Regional Inflation? Improve Budget Absorption," Economics and Finance in Indonesia, Faculty of Economics and Business, University of Indonesia, vol. 62, pages 67-77, August.
    • Handle: RePEc:lpe:efijnl:201606
    as

    Download full text from publisher

    File URL: https://lpem.org/repec/lpe/efijnl/201606.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Bojanic, Antonio N., 2018. "The impact of fiscal decentralization on growth, inflation and inequality in the Americas," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), April.
    2. Tirtosuharto, Darius & Adiwilaga, Handri, 2013. "Decentralization and Regional Inflation in Indonesia," MPRA Paper 70691, University Library of Munich, Germany.
    3. Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 451-472, June.
    4. Bambang P.S Brodjonegoro & Telissa Falianty & Beta Y. Gitaharie, 2005. "Determinant Factors of Regional Inflation in Decentralized Indonesia," Economics and Finance in Indonesia, Faculty of Economics and Business, University of Indonesia, vol. 53, pages 1-31, April.
    5. King, David & Ma, Yue, 2001. "Fiscal decentralization, central bank independence, and inflation," Economics Letters, Elsevier, vol. 72(1), pages 95-98, July.
    6. Neyapti, Bilin, 2004. "Fiscal decentralization, central bank independence and inflation: a panel investigation," Economics Letters, Elsevier, vol. 82(2), pages 227-230, February.
    7. Henderson, J. Vernon & Kuncoro, Ari, 2011. "Corruption and local democratization in Indonesia: The role of Islamic parties," Journal of Development Economics, Elsevier, vol. 94(2), pages 164-180, March.
    8. McCarthy, John F., 2004. "Changing to Gray: Decentralization and the Emergence of Volatile Socio-Legal Configurations in Central Kalimantan, Indonesia," World Development, Elsevier, vol. 32(7), pages 1199-1223, July.
    9. Yogi Vidyattama, 2013. "Regional convergence and the role of the neighbourhood effect in decentralised Indonesia," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 49(2), pages 193-211, August.
    10. Huang, Yasheng & Sheng, Yumin, 2009. "Political Decentralization and Inflation: Sub-National Evidence from China," British Journal of Political Science, Cambridge University Press, vol. 39(2), pages 389-412, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Vid Adrison, 2024. "Fiscal Sustainability in Indonesia: Policies and Progress," Asian Economic Policy Review, Japan Center for Economic Research, vol. 19(2), pages 224-247, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Emna Trabelsi, 2022. "Macroprudential Transparency and Price Stability in Emerging and Developing Countries," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 11(1), pages 105-129.
    2. Murat Cetrez & Yasin Baris Altayligil, 2022. "The Role of Macroeconomic Stability in Current Account Balances," Istanbul Journal of Economics-Istanbul Iktisat Dergisi, Istanbul University, Faculty of Economics, vol. 72(72-2), pages 569-597, December.
    3. Thornton, John, 2007. "Further evidence on revenue decentralization and inflation," Economics Letters, Elsevier, vol. 95(1), pages 140-145, April.
    4. Philip Bodman & Harry Campbell & Kelly-Ana Heaton & Andrew Hodge, "undated". "Fiscal Decentralisation, Macroeconomic Conditions and Economic Growth in Australia," MRG Discussion Paper Series 2609, School of Economics, University of Queensland, Australia.
    5. Hermann Sintim-Aboagye & Chandana Chakraborty & Serapio Byekwaso, 2012. "Uncertainty of inflation and inflation rate: Does credibility of inflation policy matter?," Economic Issues Journal Articles, Economic Issues, vol. 17(2), pages 95-110, September.
    6. Baskaran, Thushyanthan, 2012. "Revenue decentralization and inflation: A re-evaluation," Economics Letters, Elsevier, vol. 116(3), pages 298-300.
    7. Reingewertz, Yaniv, 2014. "Fiscal Decentralization - a Survey of the Empirical Literature," MPRA Paper 59889, University Library of Munich, Germany.
    8. Qiao, Mo & Ding, Siying & Liu, Yongzheng, 2019. "Fiscal decentralization and government size: The role of democracy," European Journal of Political Economy, Elsevier, vol. 59(C), pages 316-330.
    9. Tatiana Vasylieva & Sergij Lyeonov & Oleksii Lyulyov & Kostiantyn Kyrychenko, 2018. "Macroeconomic Stability and Its Impact on the Economic Growth of the Country," Montenegrin Journal of Economics, Economic Laboratory for Transition Research (ELIT), vol. 14(1), pages 159-170.
    10. Makreshanska, Suzana & Petrevski, Goran, 2015. "Fiscal Decentralization and Inflation in Central and Eastern Europe," MPRA Paper 77596, University Library of Munich, Germany, revised 16 Mar 2017.
    11. Iqbal, Nasir & Nawaz, Saima, 2010. "Fiscal Decentralization and Macroeconomic Stability: Theory and Evidence from Pakistan," MPRA Paper 27184, University Library of Munich, Germany.
    12. Neyapti, Bilin, 2006. "Revenue decentralization and income distribution," Economics Letters, Elsevier, vol. 92(3), pages 409-416, September.
    13. Harry Aginta, 2021. "Spatial dynamics of consumer price in Indonesia: convergence clubs and conditioning factors," Asia-Pacific Journal of Regional Science, Springer, vol. 5(2), pages 427-451, June.
    14. Aleh Mazol, 2015. "Local self-governance in the Republic of Belarus," BEROC Policy Paper Series 22, Belarusian Economic Research and Outreach Center (BEROC).
    15. Neyapti, Bilin, 2013. "Fiscal decentralization, fiscal rules and fiscal discipline," Economics Letters, Elsevier, vol. 121(3), pages 528-532.
    16. Neyapti, Bilin, 2010. "Fiscal decentralization and deficits: International evidence," European Journal of Political Economy, Elsevier, vol. 26(2), pages 155-166, June.
    17. Shahbaz, Muhammad & Loganathan, Nanthakumar & Mujahid, Nooreen & Ali, Amjad & Nawaz, Ahmed, 2015. "Determinants of Life Expectancy and its Prospects under the Role of Economic Misery: A Case of Pakistan," MPRA Paper 67167, University Library of Munich, Germany, revised 10 Oct 2015.
    18. D. Masciandaro, 2019. "What Bird Is That? Central Banking And Monetary Policy In The Last Forty Years," BAFFI CAREFIN Working Papers 19127, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    19. Md. Samsul Alam & Muhammad Shahbaz & Sudharshan Reddy Paramati, 2016. "The Role of Financial Development and Economic Misery on Life Expectancy: Evidence from Post Financial Reforms in India," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 128(2), pages 481-497, September.
    20. Makreshanska Suzana & Jovanovski Kiril, 2014. "Impact Of Fiscal Decentralization On Price Stability In The European Countries," Journal Articles, Center For Economic Analyses, pages 25-34, December.

    More about this item

    Keywords

    Capital Spending; Non-Capital Spending; Regional Inflation; Subnational Government;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:lpe:efijnl:201606. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Muhammad Halley Yudhistira (email available below). General contact details of provider: https://edirc.repec.org/data/feuinid.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.