• Ndari Surjaningsih Bank Indonesia
  • G. A. Diah Utari Bank Indonesia
  • Budi Trisnanto Bank Indonesia
Keywords: Inflation, output, fiscal policy, tax, discretionary, VECM


This study examines the impact of fiscal policy on output and inflation, along with a look at discretionary fiscal policy and how it impacts the volatility of output and inflation. Model Vector Error Correction Model (VECM) was applied over quarterly data, covering the period 1990 to 2009. Empirical results showed that there is a cointegration relationship between government spending and taxes with respect to output in the long-run. Unlike government spending, in the long-term, taxation has a positive effect on economic growth. Short-term adjustment suggests that an increase in government spending has a positive effect on output, while a tax increase has a negative effect. There is a greater influence of government spending on output in the short term compared to taxation policies. Therefore, government spending is more effective to stimulate economic growth especially in times of recession, compared to taxation policies. While the increase in government spending causes a decrease in inflation, tax increases lead to higher inflation. This study also indicates the absence of discretionary fiscal policy made by the government of Indonesia.


Download data is not yet available.


Akitoby, B. et al., 2004, “The Cyclical and Long_term Behavior of Government Expenditures in Developing Countries”, IMF Working Paper, WP/04/02.

Baldacci, E., 2009, “Neither Sailing Against the Wind, Nor Going with the Flow: Cyclicality of Fiskal Policy in Indonesia, IMF Country Report No. 09/231.”

Blanchard, O.J., 1990, “Suggestions for a New Set of Fiskal Indicators”, OECD Economics Department Working Papers, No.79, OECD Publishing.

Castro, Francisco De, 2003, “ The Macroeconomic Effects of Fiskal Policy in Spain”, Banco de Espana Working Paper No. 0311

Chalk, Nigel A., 2002, “Structural Balances and All That: Which Indicators to Use in Assessing Fiskal Policy”, IMF Working Paper, WP/02/101.

Fatas, Antonio & Ilian Mihov, 2003, “The Case for Restricting Fiskal Policy Discretion”, INSEAD and CEPR.

Fu, Dong et all, 2003, “ Fiskal Policy and Growth”, Federal Reserve Bank of Dallas Working Paper No. 0301

Hemming, R., M. Kell & S. Mahfouz, 2002, “The Effectiveness of Fiskal Policy in Stimulating Economic Activity Review of the Literature”, IMF Working Paper, WP/02/208.

Hermawan, D. & Anella Munro, May 2008, “Monetary-Fiscal Interaction in Indonesia”, Asian Office Research Paper, Bank for International Settlement.

Judson, Ruth & Athanasios Orphanides, 1999, “Inflation, Volatility and Growth”, International Finance, Vol. 2 No.1.

Krusec, Dejan, 2003,” The Effects of Fiskal Policy on Output in A Structural VEC Model Framework: The Case of Four EMU and Four Non -EMU OECD Countries”.

Lendvai, Julia, , 2007,” The Impact of Fiskal Policy in Hungary “, ECFIN Country Focus, Volume 4 Issue 11

Mountford, Andrew & Uhlig, Harald, 2008, “ What Are The Effects of Fiskal Policy Shock”, National Bureau of Economic Research Working Paper 1551

Perotti, Roberto, 2002, “ Estimating The Effects of Fiskal Policy in OECD Countries”, European Central Bank Working Paper No. 168.

Rother, Philipp C., 2004, “Fiskal Policy and Inflation Volatility”, European Central Bank Working Paper, No. 317.

Shaheen, Rozina & Turner, Paul, 2009, “ Measuring The Dynamic Effects of Fiskal Policy Shocks in Pakistan”, April 2012

PlumX Metrics

How to Cite
Surjaningsih, N., Utari, G. A. D., & Trisnanto, B. (2012). THE IMPACT OF FISCAL POLICY ON THE OUTPUT AND INFLATION. Buletin Ekonomi Moneter Dan Perbankan, 14(4), 367-396.