Economics & Sociology

ISSN: 2071-789X eISSN: 2306-3459 DOI: 10.14254/2071-789X
Index PUBMS: f5512f57-a601-11e7-8f0e-080027f4daa0
Article information
Title: The Effect of Twin Shock on Fiscal Sustainability in Indonesia
Issue: Vol. 11, No 1, 2018
Published date: 30-03-2018 (print) / 30-03-2018 (online)
Journal: Economics & Sociology
ISSN: 2071-789X, eISSN: 2306-3459
Authors: Insukindro Insukindro
Universitas Gadjah Mada
Keywords: Fiscal sustainability, primary deficit, fiscal reaction function, economic and exchange rate fluctuations
DOI: 10.14254/2071-789X.2018/11-1/5
Index PUBMS: 48b51bc8-8695-11e8-911b-901b0efa6e97
Language: English
Pages: 75-84 (10)
JEL classification: E62, H63
Website: http://www.economics-sociology.eu/?556,en_the-effect-of-twin-shock-on-fiscal-sustainability-in-indonesia
Licenses:
Abstract

This paper analyzes the behaviour of fiscal sustainability in Indonesia by using stationarity and cointegration tests and analyzing fiscal reaction function in Indonesia during the period of 2001-2016. It employed economic fluctuations and unanticipated exchange rates to observe the effect of twin shock on fiscal reaction function. In addition, it applied VECM (Vector Error Correction Model) to cover and estimate the behaviour of fiscal reaction function in Indonesia. The VECM is a restricted VAR specified for use with cointegrated series and has nice interpretation with short- and long-run relationships. Based on the stationarity test, cointegration and fiscal reaction function, the results indicate that there is the fiscal sustainability of the variables used, namely the foreign debt and the public sector primary deficit in the short and long term. The study indicates that the primary deficit is a key determinant of the external debt. These findings also reveal that the efforts of fiscal authorities to optimize the domestic financing sources should be supported because they can reduce the external debt and maintain the fiscal sustainability. In addition, in the long term, economic fluctuations and foreign exchange rate fluctuations have a positive effect on the external debt in Indonesia.

Bibliography

1. Adam, C., Ferrarini, B. and Park, D. (2010). Fiscal Sustainability in Developing Asia. ADB Economics Working Paper Series, 205, June.

2. Asiama, J., Akosah, N. and Owusu-Afriyie, E. (2014). An Assessment of Fiscal Sustainability in Ghana. Bank of Ghana Working Paper, WP/BOG/2014/09.

3. Bario, C., Lombardi, M. and Zampolli, F. (2016). Fiscal Sustainability and the Financial Cycle. BIS Working Paper, No. 552.

4. Bohn, H. (2007). Are Stationarity and Cointegration Restrictions Really Necessary for the Intertemporal Budget Constraint. Journal of Monetary Economics, 54, 1837-1847. DOI:10.1016/j.jmoneco.2006.12.012.

5. Camarero, M., Carrion-i-Silvestre, J. L. and Tamarit, C. (2013). The Relationship between Debt level and Fiscal Sustainability in OECD. RIAE Working Paper, 2013/15.

6. Curtasu, A. R. (2011). How to Assess Public Debt Sustainability: Empirical Evidence for Advanced European Countries. Romanian Journal of Fiscal Policy, 2(2), 20-43.

7. Ehrhart, C. and Llorca, M. (2007). A Global Perspective of Fiscal Sustainability: Evidence from a Panel of 20 OECD Countries. Paper presented at the 11th International Conference on Macroeconomic Analysis and International Finance in University of Crete,

8. Hubbard, R. G., O’Brien, A. P and M. Rafferty, M. (2014). Macroeconomics. Harlow, Essex: Pearson Education, Inc.

9. Hunter, J., Burke, S. P. and Canepa, A. (2017). Multivariate Modelling of Non-Stasionary Economic Time Series. Palgrave Texts in Econometrics.

10. Insukindro (1990). The Short- and Long-Term Determinants of Money and Bank Credit Markets in Indonesia. Ph.D Thesis, University of Essex, UK, Unpublished.

11. Insukindro (1998). Pendekatan Stok Penyangga Permintaan Uang: Tinjauan Teoritik dan Sebuah Studi Empirik di Indonesia (Buffer Stock Approach to Money Demand: Theoretical Review and an Empirical Study in Indonesia). Economics and Finance in Indonesia, XLVI

12. Krajewski, P., Mackiewicz, M. and Szymanska, A. (2016). Fiscal Sustainability in Central and Eastern European Countries – A Post-Crisis Assessment. Prague Economic Papers, 25(02), 175-188. DOI:10.18267/j.pep.553.

13. Ministry of Finance (2017), Realisasi Triwulanan APBN (Quaterly Realization of Indonesian Government’s Budget) 2000-2016.

14. Muzenda, A. (2014). An Empirical Assessment of Fiscal Sustainability in South Africa. Journal of Economics and Sustainable Development, 5(23), 1-6.

15. Neaime, S. (2015). Sustainability of Budget Deficits and Public Debt in Selected European Union Countries. Journal of Economic Asymmerics, 12, 1-21. DOI: 10.1016/j.jeca.2014.10.002.

16. Neaime, S. and Gaysset, I. (2017). Sustainability of Macroeconomic Policies in Selected Mena Countries: Post Financial and Debt Crises. Research in International Business and Finance, 40, 129-140. DOI: 10.1016/j.ribaf.2017.01.001.

17. Polito, V. and Wickens, M. (2005). Measuring Fiscal Sustainability. Centre for Dynamic Macroeconomic Analysis Conference (CDMC), 05/03, June.

18. Raymundo, R. B. (2016). Fiscal Sustainability and Sovereignty Issues under an Asean Economic Union. Paper presented at the DSLU Research Congress, De La Salle University, Manila, Philippines, March 7-9.