THE MACROECONOMIC EFFECT OF FISCAL SHOCKS IN INDONESIA

Abstract

This paper examines the macroeconomic effect of fiscal shocks during the period 2000:M3–2009:M6 in Indonesia. A structural vector autoregressive (SVAR) model is estimated using three-variable and five-variable identification schemes. Our results provide the following evidences. A symmetric positive causality between tax revenues and government spending are found to be existed. Tax shock generates a negative impact on output whilst government spending produces a contrary effect in the short run periods. Government spending and tax yield a positive and negative, respectively, effect on price for all horizons. Fiscal shocks induce a positive response of interest rates. Tax shock is considerably important to explain output fluctuations. Fiscal and monetary shocks share an equal role in explaining price variability. Finally, there is a weak evidence on the interaction between fiscal and monetary policies.