A DYNAMIC STOCHASTIC GENERAL EQUILIBRIUM (DSGE) MODEL TO ASSESS THE IMPACT OF STRUCTURAL REFORMS ON THE INDONESIAN ECONOMY

  • Sahminan Sahminan Economic and Monetary Policy Department (DKEM), Bank Indonesia
  • Ginanjar Utama Economic and Monetary Policy Department (DKEM), Bank Indonesia
  • Robbi Nur Rakman Economic and Monetary Policy Department (DKEM), Bank Indonesia
  • Idham Idham Economic and Monetary Policy Department (DKEM), Bank Indonesia
Keywords: fiscal policy, DSGE, output multiplier, welfare mulipler

Abstract

One of the Government programs to spur economic growth is to improve the availability andquality of infrastructure through increased government spending on infrastructure development. In this paper, we build a DSGE model for a small open economy to predict the impact of government spending on output and welfare in Indonesia. The DSGE model uses parameters in line with the characteristics of Indonesian economy. The simulation results show that in the short run a 1% increase in government spending on consumption and investment could potentially increase economic growth by 0.04% and 0.05%, respectively. Output multiplier of government spending on consumption is estimated at 0.03, much lower than output multiplier of the government spending on investment at 0.20. The simulation results also show that government spending on investment leads to welfare improvement with welfare multiplier at 0.05. On the other hand, an increase in government spending on consumption would leadto a decline in welfare with a multiplier of -0.001.

References

Anugrah, D. F., Rakhman, R. N., Anglingkusumo, R., Fawaqa, L., & Oseva, J. (2015). Growth
Diagnostic Banten.
Aschauer, D. A. (2000). Aschauer 2000. Economic Development and Cultural Change, 48(2),
391–406.
Bom, P. R. D., & Ligthart, J. E. (2014). Public infrastructure investment, output dynamics, and
balanced budget fiscal rules. Journal of Economic Dynamics & Control, 40, 334–354.
Calvo, G. A. (1983). Staggered prices in a utility maximizing framework. Journal of Monetary
Economics, 12, 383–398.
Cooley, E. (1995). Frontiers of Business Cycle Research. Princeton University Press.
Gali, J., & Monacelli, T. (2005). Monetary Policy and Exchange Rate Volatility In A Small Open
Economy. Review of Economic Studies, 72(252), 707–734.
Ganelli, G., & Tervala, J. (2015). The Welfare Multiplier of Public Infrastructure Investment (No.
16/40).
Harmanta, Purwanto, N. M. A., & Oktiyanto, F. (2012). Sektor Perbankan dalam Model DSGE.
Harmanta, Purwanto, N. M. A., Rachmanto, A., & Oktiyanto, F. (2013). Penyempurnaan
Pemodelan Financial Frictions pada Model DSGE-Bank Indonesia.
Harmanta, Rachmanto, A., Oktiyanto, F., & Idham. (2014). Interbank Market with DSGE Model.
IMF. (2014). World Economic Outlook: Legacies, Clouds and Uncertainties. Washington, DC.:
IMF.
Iwata, Y. (2013). Two fiscal policy puzzles revisited: New evidence and an explanation. Journal
of International Money and Finance, 33, 188–207.
Jha, S., Mallick, S., Park, D., & Quising, P. (2010). Effectiveness of countercyclical fiscal policy:
Timeseries evidence from developing Asia (No. 211).
Kahn, R. F. (1931). The Relation of Home Investment to Unemployment. The Economic Journal,
41(162), 173–198.
Kementerian Perencanaan Pembangunan Nasional/Badan Perencanaan Pembangunan Nasional.
(2014). Rencana Pembangunan Jangka Menengah Nasional 2015-2019.
Keynes, J. M. (1936). Keynes 1936 The General Theory of Employment, Interest and Money”.
Book III Chapter 10. London: Macmillan & Co.
Leduc, S., & Wilson, D. (2013). Roads to Prosperity or Bridge to Nowhere? Theory and Evidence on
the Impact of Public Infrastructure Investment. NBER Macroeconomics Annual, 27, 89–142.
Obstfeld, M., & K., R. (1998). Risk and exchange rates (No. 6694).
Quintana, P. G., & M.N., J. (2012). Bayesian Estimation of DSGE (No. 12–4). Philadelphia.
Rodrik, D. (2015). Structural Reform and Greece: Lessons from Other Lands. Retrieved from
http://drodrik.scholar.harvard.edu/links/structuralreform-%0Agreecelessons-other-lands.
Sin, J. (2016). The Fiscal Multiplier in a Small Open Economy: The Role of Liquidity Frictions.
Tabor, S. R. (2015). Constraints to Indonesia’s Economic Growth (No. 10).
Tang, H. C., Liu, P., & Cheung, E. C. (2013). Changing Impact of Fiscal Policy on Selected ASEAN
Countries. Journal of Asian Economics, 24, 103–116.
Tjahjono, E. D., Harmanta, & Waluyo, J. (2009). Bank Indonesia Structural Macromodel (BISMA).
Tjahjono, E. D., & Waluyo, J. (2010). Pemodelan Banking dan Financial Accelerator pada Model
DSGE.
World Economic Forum. (2016). Global Competitiveness Index 2016-2017. Geneva.
Published
2017-10-31
How to Cite
Sahminan, S., Utama, G., Rakman, R., & Idham, I. (2017). A DYNAMIC STOCHASTIC GENERAL EQUILIBRIUM (DSGE) MODEL TO ASSESS THE IMPACT OF STRUCTURAL REFORMS ON THE INDONESIAN ECONOMY. Buletin Ekonomi Moneter Dan Perbankan, 20(2), 149-180. https://doi.org/10.21098/bemp.v20i2.810
Section
Articles