Analysis of the Effectiveness of Indonesia's Fiscal and Monetary Policies from 1986 to 2023

Abstract

This research, titled "Analysis of the Effectiveness of Indonesia's Fiscal and Monetary Policies from 1986 to 2023" aims to determine the more effective policy between fiscal and monetary policies for the Indonesian economy. The study uses the IS-LM model and the Engle-Granger error correction model (ECM-EG) to estimate various variables, incorporating four structural equations, three exogenous variables, and two identity equations. Policy effectiveness is gauged by its impact on GDP, measured through policy multipliers. The study measures equilibrium interest rates and GDP in both goods and money markets, assuming fixed prices, using data on GDP, consumption, investment, government spending, exports, imports, money supply, national income, and interest rates. Findings reveal that from 1986 to 2023, the average equilibrium national income and interest rate in Indonesia were approximately 296.5% and Rp 332,662,805,450, respectively. The fiscal policy multiplier was found to be 0.83, while the monetary policy multiplier was 0.66. The results indicate that fiscal policy is more effective than monetary policy in influencing national GDP growth. This suggests that each unit increase in government expenditure has a greater impact compared to an equivalent increase in the money supply through monetary policy, thereby highlighting the importance of fiscal measures in economic growth.