Fiscal Cyclicality Under State Finances Law in Indonesia
Abstract
This study aims to analyze the cyclicality of fiscal policy under state finances law in Indonesia. The Indonesian government officially enacted the 2003 and 2004 Laws on State Finances, and it regulates fiscal rules covering the amount of the budget deficit and balanced budget rules. This fiscal rule is expected to encourage fiscal cyclicality to become countercyclical and provide buffering to deal with various economic shocks. This study uses quarterly time-series data from 2001 to 2019. The years 2001-2004 are used as the years prior to implementing the State Finance Law. Moreover, 2005 – 2019 is the time to capture the effects of cyclicality after implementing the Law. This study uses a dynamic distributed lag model to see the effect of GDP on government spending behavior. This study indicates that fiscal cyclicality before implementing the Law on State Finance behaved acyclically. Meanwhile, after implementing the Laws, this fiscal behavior is still procyclical. It means that the fiscal rules have not been effective in changing the direction and behavior of the fiscal to be countercyclical.
Keywords
Full Text:
PDFReferences
Abdurohman, and Resosudarmo, B. P. (2016). The behavior of fiscal policy in Indonesia in response to economic cycles. The Singapore Economic Review, 61(1), 377–401.
Akitoby, B., Clements, B., Gupta, S., and Inchauste, G. (2004). The cyclical and long-term behavior of government expenditures in developing countries. IMF Working Papers, 04/202.
Alesina, A., Campante, F. R., and Tabellini, G. (2008). Why is fiscal policy often procyclical?, Journal of the European Economic Association, 6(5), 1006–1036.
Baldacci, E., Goyal, R., and Arranz, M, R. (2009). Neither sailing against the wind, nor going woth the flow: cyclicality of fiscal policy in Indonesia. IMF Country Report. 09/23. 11-22.
Blanchard, O., and Giavazzi, F. (2004). Improving the SGP through a proper accounting of public investment. CEPR Discussion Papers. 4220.
Boushey, H., Nunn, R., Shambaugh, J, 2019. Fiscal Policies to stabilize the American economy. The Hamilton Project. Washington DC.
Chian, W, K, 2016, Fiscal cyclicality in Brunei Darussalam. Journal of Southeast Asian Economies. Vol.33, No.1, pp.83-94
Crichton, D.R., Vegh, C. A., and Vuletin, G. (2015). Procyclical and countercyclical fiscal multipliers: Evidence from OECD countries. Journal of International Money and Finance, 52, 15-13.
Dioikitopoulos, E. V. (2018). Dynamic adjustment of fiscal policy under a debt crisis. Journal of Economic Dynamics and Control, 93, 260–276.
Eyraud, L., Debrun, X., Hodge, A., Lledo, V., and Pattilo, C. (2018). Second-generation fiscal rules: balancing simplicity, flexibility, and enforceability. IMF, Staff Discussion Note, SDN/18/04.
Frankel, J,A., Vegh.C.A., and Vuletin, G. (2011). On graduation from fiscal procyclicality. NBER Working Paper Series, 17619.
Gavin, M., and Perotti, R. (1997). Fiscal policy in Latin Amerika. NBER Macroeconomics Annual 1997. MIT Press, 12, 11-72.
Gootjes, B., and de Haan, J. (2020). Procyclicality of fiscal policy in European Union countries. Journal of International Money and Finance, 120, 102276.
Guerguil, M., Mandon, P., and Tapsoba, R. (2017). Flexible fiscal rules and countercyclical fiscal policy. Journal of Macroeconomics, 52, 189–220.
Gujarati, D.N, and Porter, D. C. (2008). Basic Econometrics, 5th Edition. New York, Mass, McGraw-Hill.
Gupta, S., Clements, B., Baldacci, E., Granados, M,C. (2005). Fiscal policy, expenditure composition, and growth in low-income countries. Journal of International Money and Finance, 24(3), 441–463.
Havard, H., and Bleaney, M. (2011). Explaining the procyclicality of fiscal policy in developing countries. Credit Research Paper, 11/09.
Ilzetzky, E., and Vegh, C, A. (2008). Procyclical fiscal policy in developing countries: truth or fiction?. NBER Working Paper Series, 14191.
Kaminsky, G. L., Reinhart, C. M., and Végh, C. A. (2004). When it rains, it pours: procyclical capital flows and macroeconomic policies. NBER Macroeconomics Paper Series, 10780.
Konuki. T., and Villafuerte, M. (2016). Cyclical behavior of fiscal policy among Sub-Saharan African countries. IMF- The African Department Series, 16/09.
Kumhof, M. and Laxton, D. (2009). Simple, implementable fiscal policy rules. IMF Working Papers, 09(76).
Kydland, F., and Prescott, E. (1982). Time to build and aggregate fluctuations. Journal of the econometric Society, 50(6), 1345–1370.
Lane, P. R. (2003). The cyclical behaviour of fiscal policy: evidence from the OECD. Journal of Public Economics, 87(12), 2661–2675.
Maravalle, A. and Claeys, P. (2012). Boom-bust cycles and procyclical fiscal policy in a small open economy, Journal of Policy Modeling, 34(5), 735–754.
Maravalle, A., and Rawdanowicz, L, 2020. How effective are automatic fiscal stabilizer in the OECD Countries?. OECD, Economic Department Working Paper, No. 1635. ECO/WKP (2020)43.
Misra, S. and Ranjan, R. (2018). Fiscal rules and procyclicality: an empirical analysis. Indian Economic Review, 53(1–2), 207–228.
Muscatelli, V. A., Natale, P. and Tirelli, P. (2012). A simple and flexible alternative to the stability and growth pact deficit ceilings. Is it at hand?,” European Journal of Political Economy, 28(1),14–26.
Nizar, M.A. (2015). Cyclicality of fiscal policy in Indonesia. MPRA Paper Series, 65606.
Shaw, G. K. (1972). Fiscal policy. London: Macmillan Studies.
Surjaningsih, N., Utari, G. A. D. and Trisnanto, B. (2011). Dampak kebijakan fiskal terhadap output and inflasi. Buletin Ekonomi Moneter and Perbankan, 14(4), 389–420.
Talvi, E. and Végh. C. A. (2000). Tax base variability and procyclical fiscal policy. NBER Working Paper Series, 7499.
Talvi, E. and Végh, C. A. (2005). Tax base variability and procyclical fiscal policy in developing countries. Journal of Development Economics, 78(1), 156–190.
Vegh, C. A. and Vuletin, G. (2013). Overcoming the fear of free falling: monetary policy graduation in Emerging Markets, 105–129.
DOI: http://dx.doi.org/10.17977/um002v14i12022p109
Refbacks
- There are currently no refbacks.
ISSN (Print) 2086-1575 ISSN (Online) 2502-7115
This work is licensed under a Creative Commons Attribution-NoDerivatives 4.0 International License.