Fiscal and Monetary Policy Interactions in Indonesia During Periods of Economic Turmoil in the Us: 2001q1-2014q4

Abstract

This study investigates the formation of the interaction between monetary and fiscal policies in Indonesia during periods of economic turmoil in the US (external shock) based on the Hybrid New Keynesian (HNK) model. The study estimates the HNK model using the Full Information Maximum Likelihood and time-series data over theperiod 2001Q1-2014Q4. The result reveals the form of coordination is a monetary-led policy mix between active monetary policy and passive fiscal policy. The degree of coordination is down when external shock increases.

The Impact of Interest Rate Spillover on Output Gap: A Dynamic Spatial Durbin Model

“…Economic recovery strategies can be implemented through fiscal and monetary stimuli to increase national output (Baldwin and Mauro 2020;Hubbard et al 2014;Iacoviello and Navarro 2019). The central bank can maintain its benchmark interest rate to reduce recessionary pressure through policy coordination and quantitative easing (Utama et al 2022).…”

“…Governments and monetary authorities worldwide are coordinating policies to restore the economic conditions affected by external shocks. Most previous studies in many countries have indicated that coordination is better than isolation (Baldwin and Mauro 2020;Utama et al 2022).…”

“…The United States (US) central bank's interest rate policy, the Federal Reserve (Fed), affects the global economy (Iacoviello and Navarro 2019;X. Tang 2022;Ntshangase et al 2023;Utama et al 2022). The Fed's tightening of the Federal Fund Rate (FFR) caused an interest rate differential between countries.…”