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Does Indonesia Pursue Sustainable Fiscal Policy?

Author

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  • Rudi Kurniawan

    (Department of Economics, Padjadjaran University)

Abstract

In this paper, I examine the sustainability of Indonesian fiscal policy by looking at how the primary balance-to-GDP ratio has responded to variations of the debt-to-GDP ratio, as suggested by Bohn's (1998) Model Based Sustainability approach. This approach is motivated by dissatisfaction with most of the literature that use unit root and cointegration tests in combination with the intertemporal budget constraint. It is argued that unit root or cointegration tests have low power in rejection unit root from near unit root alternatives. Furthermore, Bohn (2005) shows that the consistency with the intertemporal budget constraint (IBC) is not a sufficient condition for debt stationary. It is possible to satisfy the IBC while simultaneously having a mildly explosive path of debt-to-GDP ratios. Using a data set covering the period 1990 – 2010 and controlling for measures of cyclical variations in GDP and temporary government expenditure, I find a significantly positive response of the primary balance-to-GDP ratio to variations in the debt-to-GDP ratio, and that response has been stable since 2000. Moreover, I also find that the debt-to-GDP ratio tends to be mean-reverting due to a nominal growth dividend. These results suggest that the government have significant and strong fiscal response to changes in debt-to-GDP ratio and that the stability of debt-to-GDP ratio is dependent on the growth rate of the economy.

Suggested Citation

  • Rudi Kurniawan, 2015. "Does Indonesia Pursue Sustainable Fiscal Policy?," Working Papers in Economics and Development Studies (WoPEDS) 201504, Department of Economics, Padjadjaran University, revised Nov 2015.
    • Handle: RePEc:unp:wpaper:201504
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    File URL: http://ceds.feb.unpad.ac.id/wopeds/201504.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Fiscal Policy; Indonesia;

    JEL classification:

    • H6 - Public Economics - - National Budget, Deficit, and Debt

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