IDEAS home Printed from https://ideas.repec.org/p/unp/wpaper/201415.html
   My bibliography  Save this paper

Can Indonesia’s Fiscal Policy be Sustained, with Exploding Debt?

Author

Listed:
  • Tari Lestari

    (Directorate of State Finance and Monetary Analysis (BAPPENAS))

Abstract

The debate over debt issues always becomes hot potatoes to be discussed. Recent data in debt position which accounted for 1.977,71 trillion IDR onDecember31st2012 has made a thousand eyes looking at The Central Government and questioning whether Indonesia should continue to rely on debt for development financing, and whether its debt level is dangerous for fiscal sustainability or not. This paper analyzes debt sustainability by using Natural Debt Limit (NDL) approach introduced by Mendoza-Oveido. In order to examine how the Indonesian government reacts to changes in its debt position, this paper estimates fiscal reaction functions using an econometric approach, namely Vector Error Correction Model (VECM). The result shows that: (i) natural debt limit for Indonesia is 32,3% over GDP; (ii) since 1992 the central government has run a sustainable fiscal policy, by reducing the primary deficit or increasing the surplus in response towards rising debt. Indonesia has a space to utilize more debt, but in a good manner (well-managed) especially aimed for productive and priority spending such as for infrastructure and education.

Suggested Citation

  • Tari Lestari, 2014. "Can Indonesia’s Fiscal Policy be Sustained, with Exploding Debt?," Working Papers in Economics and Development Studies (WoPEDS) 201415, Department of Economics, Padjadjaran University, revised Nov 2014.
    • Handle: RePEc:unp:wpaper:201415
    as

    Download full text from publisher

    File URL: http://lp3e.fe.unpad.ac.id/wopeds/201415.pdf
    File Function: First version, 2014
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Campos, Camila F.S. & Jaimovich, Dany & Panizza, Ugo, 2006. "The unexplained part of public debt," Emerging Markets Review, Elsevier, vol. 7(3), pages 228-243, September.
    2. Evan Tanner & Alberto Ramos, 2003. "Fiscal sustainability and monetary versus fiscal dominance: evidence from Brazil, 1991-2000," Applied Economics, Taylor & Francis Journals, vol. 35(7), pages 859-873.
    3. 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.
    4. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-971, October.
    5. Enrique G. Mendoza & P. Marcelo Oviedo, 2006. "Fiscal Policy and Macroeconomic Uncertainty in Developing Countries: The Tale of the Tormented Insurer," NBER Working Papers 12586, National Bureau of Economic Research, Inc.
    6. Danny Cassimon & Bjorn van Campenhout, 2007. "Aid Effectiveness, Debt Relief and Public Finance Response: Evidence from a Panel of HIPCs," WIDER Working Paper Series RP2007-59, World Institute for Development Economic Research (UNU-WIDER).
    7. World Bank, 2000. "Indonesia : Managing Government Debt and its Risks," World Bank Publications - Reports 15198, The World Bank Group.
    8. Hausmann, Ricardo & Panizza, Ugo & Rigobon, Roberto, 2006. "The long-run volatility puzzle of the real exchange rate," Journal of International Money and Finance, Elsevier, vol. 25(1), pages 93-124, February.
    9. P. Marcelo Oviedo & Enrique Mendoza, 2004. "Public Debt, Fiscal Solvency, and Macroeconomic Uncertainty in Emerging Markets: The Tale of the Tormented Insurer," Econometric Society 2004 North American Summer Meetings 647, Econometric Society.
    10. Marcelo Oviedo & Enrique G. Mendoza, 2004. "Public Debt, Fiscal Solvency & Macroeconomic Uncertainty in Emerging Markets: The Tale of the Tormented Insurer," 2004 Meeting Papers 14, Society for Economic Dynamics.
    11. John Weeks & Terry McKinley, 2006. "Does Debt Relief Increase Fiscal Space in Zambia? The MDG Implications," Research Report 5, International Policy Centre for Inclusive Growth.
    12. Bohn, Henning, 2007. "Are stationarity and cointegration restrictions really necessary for the intertemporal budget constraint?," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 1837-1847, October.
    13. Charl Jooste & Mr. Alfredo Cuevas & Ian C. Stuart & Philippe Burger, 2011. "Fiscal sustainability and the fiscal reaction function for South Africa," IMF Working Papers 2011/069, International Monetary Fund.
    14. Mr. Nigel A Chalk & Mr. Richard Hemming, 2000. "Assessing Fiscal Sustainability in Theory and Practice," IMF Working Papers 2000/081, International Monetary Fund.
    15. Campos, Camila F.S. & Jaimovich, Dany & Panizza, Ugo, 2006. "The unexplained part of public debt," Emerging Markets Review, Elsevier, vol. 7(3), pages 228-243, September.
    16. Danny Cassimon & Bjorn Van Campenhout, 2007. "Aid Effectiveness, Debt Relief and Public Finance Response: Evidence from a Panel of HIPC Countries," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 143(4), pages 742-763, December.
    17. Ugo Panizza, 2008. "Domestic And External Public Debt In Developing Countries," UNCTAD Discussion Papers 188, United Nations Conference on Trade and Development.
    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. Bayan Mohamad Alshaib & Abdullah Mohammad Ghazi Al khatib & Alina Cristina Nuta & Mohamad Hamra & Pradeep Mishra & Rajani Gautam & Sarfraz Hussain & Cristina Gabriela Zamfir, 2023. "Fiscal Sustainability and Its Implications for Economic Growth in Egypt: An Empirical Analysis," SAGE Open, , vol. 13(4), pages 21582440231, December.

    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. Enrique G. Mendoza & P. Marcelo Oviedo, 2009. "Public Debt, Fiscal Solvency and Macroeconomic Uncertainty in Latin America The Cases of Brazil, Colombia, Costa Rica and Mexico," Economía Mexicana NUEVA ÉPOCA, CIDE, División de Economía, vol. 0(2), pages 133-173, July-Dece.
    2. Reischmann, Markus, 2016. "Creative accounting and electoral motives: Evidence from OECD countries," Journal of Comparative Economics, Elsevier, vol. 44(2), pages 243-257.
    3. Ugo Panizza, 2008. "The External Debt Contentious Six Years after the Monterrey Consensus," G-24 Discussion Papers 51, United Nations Conference on Trade and Development.
    4. Fournier, Jean-Marc & Fall, Falilou, 2017. "Limits to government debt sustainability in OECD countries," Economic Modelling, Elsevier, vol. 66(C), pages 30-41.
    5. Markus Reischmann, 2016. "Empirical Studies on Public Debt and Fiscal Transfers," ifo Beiträge zur Wirtschaftsforschung, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 63.
    6. D’Erasmo, P. & Mendoza, E.G. & Zhang, J., 2016. "What is a Sustainable Public Debt?," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 2493-2597, Elsevier.
    7. Danny Cassimon & Dennis Essers & Karel Verbeke, 2015. "What to do after the clean slate? Post-relief public debt sustainability and management," BeFinD Working Papers 0103, University of Namur, Department of Economics.
    8. José Alves & Clarisse Wagner, 2024. "Leveraging interest-growth differentials: Hidden effects of government financial assets in the European Union," Working Papers REM 2024/0307, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    9. Jaramillo, Laura & Mulas-Granados, Carlos & Kimani, Elijah, 2017. "Debt spikes and stock flow adjustments: Emerging economies in perspective," Journal of Economics and Business, Elsevier, vol. 94(C), pages 1-14.
    10. Mr. Evan C Tanner, 2013. "Fiscal Sustainability: A 21st Century Guide for the Perplexed," IMF Working Papers 2013/089, International Monetary Fund.
    11. Forslund, Kristine & Lima, Lycia & Panizza, Ugo, 2011. "The determinants of the composition of public debt in developing and emerging market countries," POLIS Working Papers 156, Institute of Public Policy and Public Choice - POLIS.
    12. María del Carmen Ramos-Herrera & Simón Sosvilla-Rivero, 2020. "Fiscal Sustainability in Aging Societies: Evidence from Euro Area Countries," Sustainability, MDPI, vol. 12(24), pages 1-20, December.
    13. Tashevska, Biljana & Trpkova-Nestorovska, Marija & Trenovski, Borce, 2017. "Estimating a fiscal reaction function for the South East European countries," MPRA Paper 91298, University Library of Munich, Germany, revised 2018.
    14. Laura Jaramillo & Mr. Carlos Mulas-Granados & Elijah Kimani, 2016. "The Blind Side of Public Debt Spikes," IMF Working Papers 2016/202, International Monetary Fund.
    15. Felix Kimtai Kiminyei, 2019. "Empirical Investigation on the Relationship among Kenyan Public Debt, Tax Revenue and Government Expenditure," Academic Journal of Economic Studies, Faculty of Finance, Banking and Accountancy Bucharest,"Dimitrie Cantemir" Christian University Bucharest, vol. 5(1), pages 142-159, March.
    16. Panizza, Ugo & Fatás, Antonio & Ghosh, Atish R. & ,, 2019. "The Motives to Borrow," CEPR Discussion Papers 13735, C.E.P.R. Discussion Papers.
    17. Yilmaz Akyüz, 2007. "Debt Sustainability in Emerging Markets: A Critical Appraisal," Working Papers 61, United Nations, Department of Economics and Social Affairs.
    18. Shodiya Olayinka Abideen & Sanyaolu Wasiu Abiodun & Ojenike Joseph Olushola & Ogunmefun Gbadebo Tirimisiyu, 2019. "Shareholder Wealth Maximization and Investment Decisions of Nigerian Food and Beverage Companies," Acta Universitatis Sapientiae, Economics and Business, Sciendo, vol. 7(1), pages 47-63, December.
    19. Serju-Thomas, Prudence, 2020. "Fiscal sustainability: The case for Jamaica," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 1(1).
    20. repec:nam:befdwp:3 is not listed on IDEAS
    21. Saeid Mahdavi, 2014. "Bohn's Test of Fiscal Sustainability of the American State Governments," Southern Economic Journal, John Wiley & Sons, vol. 80(4), pages 1028-1054, April.

    More about this item

    Keywords

    Crisis; Fiscal sustainability; Natural Debt Limit; Public Debt; Fiscal Reaction Function; Deficits;
    All these keywords.

    JEL classification:

    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:unp:wpaper:201415. 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: Arief Anshory Yusuf (email available below). General contact details of provider: https://edirc.repec.org/data/lppadid.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.