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Structural breaks and fiscal sustainability of the Indonesian government budget

Author

Listed:
  • Ivantia S. Mokoginta
  • Ria Marisa Stephanie

    (Faculty of Economics, Parahiyangan Catholic University, Bandung, Indonesia.
    Faculty of Economics, Parahiyangan Catholic University, Bandung, Indonesia.)

Abstract

The purpose of this study is to identify government policy regimes or structural breaks as indicated by significant changes in debt to GDP ratio and to identify fiscal sustainability in Indonesia from 2000 to 2013. Using Fiscal Reaction Functions framework and Smooth Transition Regression, the study found two structural breaks following the three regimes. Foreign debt repayment dominates the government policy during Regime I. Fiscal consolidations and discipline such as reducing energy subsidies in 2002 and 2005, managing debt portfolio and increasing government revenues were dominant during Regime II. In Regime III, the government increases domestic debt, particularly to finance stimulus package. This study also found that the fiscal is unsustainable during the period of study. Overall, the findings seem to suggest that managing government debt through fiscal consolidations, foreign debt repayment and debt portfolio management is not sufficient to achieve long-term fiscal sustainability.

Suggested Citation

  • Ivantia S. Mokoginta & Ria Marisa Stephanie, 2015. "Structural breaks and fiscal sustainability of the Indonesian government budget," Economic Journal of Emerging Markets, Universitas Islam Indonesia, vol. 7(1), pages 33-47, April.
    • Handle: RePEc:uii:journl:v:7:y:2015:i:1:p:33-47
    DOI: http://dx.doi.org/10.20885/ejem
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    References listed on IDEAS

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    3. Stephen Marks, 2004. "Fiscal sustainability and solvency: theory and recent experience in Indonesia," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 40(2), pages 227-242.
    4. Emilia Câmpeanu & Andreea Stoian, 2010. "Fiscal Policy Reaction in the Short Term for Assessing Fiscal Sustainability in the Long Runin Central and Eastern European Countries," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 60(6), pages 501-518, December.
    5. Luiz de Mello, 2008. "Estimating a fiscal reaction function: the case of debt sustainability in Brazil," Applied Economics, Taylor & Francis Journals, vol. 40(3), pages 271-284.
    6. Jasper Lukkezen & Hugo Rojas-Romagosa, 2012. "When is debt sustainable?," CPB Discussion Paper 212, CPB Netherlands Bureau for Economic Policy Analysis.
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    More about this item

    Keywords

    fiscal; debt; portfolio; consolidation; government;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H1 - Public Economics - - Structure and Scope of Government
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents

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