IDEAS home Printed from https://ideas.repec.org/a/wsi/serxxx/v62y2017i02ns0217590816500041.html
   My bibliography  Save this article

The Behavior Of Fiscal Policy In Indonesia In Response To Economic Cycles

Author

Listed:
  • ABDUROHMAN

    (Indonesian Ministry of Finance, Indonesia)

  • BUDY P. RESOSUDARMO

    (#x2020;Arndt-Corden Department of Economics, Crawford School of Economics and Government, The Australian National University, 9 Fellows Rd, Commbs Bld., Canberra, Australia)

Abstract

The current general wisdom regarding fiscal policy in response to fluctuations in economic cycles is to adopt countercyclical strategies: contractive during a boom to avoid overheating the economy and expansive during a recession to stimulate economic activity. This paper attempts to investigate the practical behavior of fiscal policy in Indonesia in response to economic cycles to establish whether it follows general fiscal wisdom (countercyclical) or amplifies the cycle (procyclical). An error correction model (ECM) and an alternative model to deal with the possible endogeneity problem are utilized. This paper shows that fiscal policy in Indonesia tends to be procyclical. Observations of some other ASEAN countries, namely Malaysia, the Philippines, Singapore and Thailand, indicate that Singapore could be the only country in ASEAN that is able to implement a countercyclical fiscal policy.

Suggested Citation

  • Abdurohman & Budy P. Resosudarmo, 2017. "The Behavior Of Fiscal Policy In Indonesia In Response To Economic Cycles," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 62(02), pages 377-401, June.
    • Handle: RePEc:wsi:serxxx:v:62:y:2017:i:02:n:s0217590816500041
    DOI: 10.1142/S0217590816500041
    as

    Download full text from publisher

    File URL: http://www.worldscientific.com/doi/abs/10.1142/S0217590816500041
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://libkey.io/10.1142/S0217590816500041?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Alberto Alesina & Filipe R. Campante & Guido Tabellini, 2008. "Why is Fiscal Policy Often Procyclical?," Journal of the European Economic Association, MIT Press, vol. 6(5), pages 1006-1036, September.
    2. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Végh, 2005. "When It Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Chapters, in: NBER Macroeconomics Annual 2004, Volume 19, pages 11-82, National Bureau of Economic Research, Inc.
    3. Ernesto Stein & Ernesto Talvi & Alejandro Grisanti, 1999. "Institutional Arrangements and Fiscal Performance: The Latin American Experience," NBER Chapters, in: Fiscal Institutions and Fiscal Performance, pages 103-134, National Bureau of Economic Research, Inc.
    4. Peter C. B. Phillips & Bruce E. Hansen, 1990. "Statistical Inference in Instrumental Variables Regression with I(1) Processes," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 57(1), pages 99-125.
    5. Zivot, Eric & Andrews, Donald W K, 2002. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 25-44, January.
    6. Sen, Amit, 2003. "On Unit-Root Tests When the Alternative Is a Trend-Break Stationary Process," Journal of Business & Economic Statistics, American Statistical Association, vol. 21(1), pages 174-184, January.
    7. Ernesto Talvi & Carlos A. Vegh, 2000. "Tax Base Variability and Procyclical Fiscal Policy," NBER Working Papers 7499, National Bureau of Economic Research, Inc.
    8. W. Corden, 2011. "Ambulance Economics: The Pros and Cons of Fiscal Stimuli," Open Economies Review, Springer, vol. 22(2), pages 235-245, April.
    9. Phillips, P.C.B., 1986. "Understanding spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 33(3), pages 311-340, December.
    10. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
    11. Ethan Ilzetzki & Carlos A. Vegh, 2008. "Procyclical Fiscal Policy in Developing Countries: Truth or Fiction?," NBER Working Papers 14191, National Bureau of Economic Research, Inc.
    12. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-836, July.
    13. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
    14. Lane, Philip R., 2003. "The cyclical behaviour of fiscal policy: evidence from the OECD," Journal of Public Economics, Elsevier, vol. 87(12), pages 2661-2675, December.
    15. Michel Strawczynski & Josheph Zeira, 2007. "Cyclicality of fiscal policy in Israel," Israel Economic Review, Bank of Israel, vol. 5(1), pages 47-66.
    16. James M. Poterba & Jürgen von Hagen, 1999. "Fiscal Institutions and Fiscal Performance," NBER Books, National Bureau of Economic Research, Inc, number pote99-1.
    17. W. Max Corden, 2010. "The theory of the fiscal stimulus: how will a debt-financed stimulus affect the future?," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 26(1), pages 38-47, Spring.
    18. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    19. Kristin J. Forbes & Roberto Rigobon, 2002. "No Contagion, Only Interdependence: Measuring Stock Market Comovements," Journal of Finance, American Finance Association, vol. 57(5), pages 2223-2261, October.
    20. Gregory, Allan W & Hansen, Bruce E, 1996. "Tests for Cointegration in Models with Regime and Trend Shifts," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 58(3), pages 555-560, August.
    21. Gregory, Allan W. & Hansen, Bruce E., 1996. "Residual-based tests for cointegration in models with regime shifts," Journal of Econometrics, Elsevier, vol. 70(1), pages 99-126, January.
    22. Michael Gavin & Roberto Perotti, 1997. "Fiscal Policy in Latin America," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 11-72, National Bureau of Economic Research, Inc.
    23. MacKinnon, James G, 1996. "Numerical Distribution Functions for Unit Root and Cointegration Tests," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(6), pages 601-618, Nov.-Dec..
    24. Agenor, Pierre-Richard & McDermott, C John & Prasad, Eswar S, 2000. "Macroeconomic Fluctuations in Developing Countries: Some Stylized Facts," The World Bank Economic Review, World Bank, vol. 14(2), pages 251-285, May.
    25. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, vol. 10(2), pages 139-162.
    26. W. Max Corden, 2007. "Those Current Account Imbalances: A Sceptical View1," The World Economy, Wiley Blackwell, vol. 30(3), pages 363-382, March.
    27. International Monetary Fund, 2009. "Indonesia: Selected Issues," IMF Staff Country Reports 2009/231, International Monetary Fund.
    28. Iman Sugema & Anis Chowdhury, 2005. "Aid and Fiscal Behaviour in Indonesia: The case of a lazy government," Centre for International Economic Studies Working Papers 2005-06, University of Adelaide, Centre for International Economic Studies.
    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. Haryo Kuncoro, 2018. "The impact of government consumption on the private expenditures in developing country: the case of Indonesia," Business and Economic Horizons (BEH), Prague Development Center, vol. 14(1), pages 1-16, January.
    2. Kuncoro Haryo, 2016. "The Credibility of Fiscal Rules Policy and Business Cycle Volatility," Scientific Annals of Economics and Business, Sciendo, vol. 63(2), pages 209-224, June.
    3. Haryo Kuncoro, 2020. "Interest Rate Policy and Exchange Rates Volatility Lessons from Indonesia," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 9(2), pages 19-42.
    4. Haryo Kuncoro, 2014. "The cyclicality of government expenditure in developing country: the case of Indonesia," Economic Journal of Emerging Markets, Universitas Islam Indonesia, vol. 6(1), pages 23-37, April.

    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. Arze del Granado, Javier & Gupta, Sanjeev & Hajdenberg, Alejandro, 2013. "Is Social Spending Procyclical? Evidence for Developing Countries," World Development, Elsevier, vol. 42(C), pages 16-27.
    2. Tang, Chor Foon, 2011. "Tourism, real output and real effective exchange rate in Malaysia: a view from rolling sub-samples," MPRA Paper 29379, University Library of Munich, Germany.
    3. D. Ventosa-Santaulària, 2009. "Spurious Regression," Journal of Probability and Statistics, Hindawi, vol. 2009, pages 1-27, August.
    4. Getu Hailu & Alex Maynard & Alfons Weersink, 2015. "Empirical analysis of corn and soybean basis in Canada," Applied Economics, Taylor & Francis Journals, vol. 47(51), pages 5491-5509, November.
    5. Mr. Sanjeev Gupta & Alejandro Hajdenberg & Mr. Javier Arze del Granado, 2010. "Is Social Spending Procyclical?," IMF Working Papers 2010/234, International Monetary Fund.
    6. Chor Foon Tang & Kean Siang Ch’ng, 2012. "A Multivariate Analysis of the Nexus between Savings and Economic Growth in the ASEAN-5 Economies," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 6(3), pages 385-406, August.
    7. Chor Foon Tang and Eu Chye Tan, 2012. "Electricity Consumption and Economic Growth in Portugal: Evidence from a Multivariate Framework Analysis," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4).
    8. Chor Foon Tang & Ilhan Ozturk, 2017. "Can Inflation be Claimed as a Monetary Phenomenon? The Malaysian Experience," International Journal of Economics and Financial Issues, Econjournals, vol. 7(3), pages 453-460.
    9. Saba Charles Shaaba, 2022. "Defence Spending and Economic Growth in South Africa: Evidence from Cointegration and Co-Feature Analysis," Peace Economics, Peace Science, and Public Policy, De Gruyter, vol. 28(1), pages 51-100, February.
    10. Luis F. Martins & Paulo M. M. Rodrigues, 2022. "Tests for segmented cointegration: an application to US governments budgets," Empirical Economics, Springer, vol. 63(2), pages 567-600, August.
    11. Tang, Chor Foon, 2011. "Multivariate Granger Causality and the Dynamic Relationship between Health Care Spending, Income and Relative Price of Health Care in Malaysia," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 52(2), pages 199-214, December.
    12. Céspedes, Luis Felipe & Velasco, Andrés, 2014. "Was this time different?: Fiscal policy in commodity republics," Journal of Development Economics, Elsevier, vol. 106(C), pages 92-106.
    13. Sandy Suardi, 2010. "Nonstationarity, cointegration and structural breaks in the Australian term structure of interest rates," Applied Economics, Taylor & Francis Journals, vol. 42(22), pages 2865-2879.
    14. Jeffrey Frankel, 2011. "Over-optimism in forecasts by official budget agencies and its implications," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 27(4), pages 536-562.
    15. Akitoby, Bernardin & Clements, Benedict & Gupta, Sanjeev & Inchauste, Gabriela, 2006. "Public spending, voracity, and Wagner's law in developing countries," European Journal of Political Economy, Elsevier, vol. 22(4), pages 908-924, December.
    16. Ms. Gabriela Inchauste & Mr. Bernardin Akitoby & Mr. Benedict J. Clements & Mr. Sanjeev Gupta, 2004. "The Cyclical and Long-Term Behavior of Government Expenditures in Developing Countries," IMF Working Papers 2004/202, International Monetary Fund.
    17. Brittle, Shane, 2009. "Ricardian Equivalence and the Efficacy of Fiscal Policy in Australia," Economics Working Papers wp09-10, School of Economics, University of Wollongong, NSW, Australia.
    18. Sean J. Gossel & Nicholas Biekpe, 2013. "The Cyclical Relationships Between South Africa's Net Capital Inflows and Fiscal and Monetary Policies," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 49(2), pages 64-83, March.
    19. Haiqi Li Author-Name-First: Haiqi & Jing Zhang & Chaowen Zheng, 2023. "Estimating and Testing for Functional Coefficient Quantile Cointegrating Regression," Economics Discussion Papers em-dp2023-07, Department of Economics, University of Reading.
    20. John D. Levendis, 2018. "Time Series Econometrics," Springer Texts in Business and Economics, Springer, number 978-3-319-98282-3, April.

    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:wsi:serxxx:v:62:y:2017:i:02:n:s0217590816500041. 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: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscinet.com/ser/ser.shtml .

    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.