Mundell-Fleming Model: The Effectiveness of Indonesia�s Fiscal and Monetary Policies

Abstract

This study examines the fiscal and monetary policy in Indonesia using the Mundell-Fleming model. The main objective of this study was to determine which policies are effective between fiscal and monetary policies of the national income in Indonesia because Indonesia is a small open economy with not perfect capital mobility. The analysis technique used is Two Stage Least Square (TSLS) by using secondary data base on International Financial Statistics, 2000.I 2014.II . The research result is monetary policy is more effective than the fiscal policy in which monetary policy multiplier at 0.0028 greater than fiscal policy multiplier 0.001316. The results are consistent with the theory of the Mundell-Fleming.

Relative responses of trade in goods and services to currency devaluation: Evidence from Ethiopia

“…Mundell [ 27 ] documented the relative importance of fiscal and monetary policies under the two exchange rate regimes while considering perfect capital mobility. These works had a significant impact on how little room there is for monetary policy with a fixed exchange rate, even in Keynesian settings [ 28 , 29 ].…”

“…The Marshall-Lerner condition (MLC), which is based on the well-known works of Marshall and Lerner, was followed by the introduction of additional prerequisites for the improvement of the balance of payments following an adjustment to the exchange rate [ 28 , [30] , [31] , [32] ]. MLC suggests that for the devaluing country to benefit from devaluation, the sum of the price elasticity of foreign demand for exports and the price elasticity of domestic demand for imports must be greater than one on an absolute basis [ 24 , 32 , 33 ].…”