Fiscal and Monetary Policy Interaction Post Indonesian Institutional Transformation: Vector Autoregression Approach

A consensus to separate fiscal and monetary authority emerged to achieve optimal macroeconomic conditions through credible policy. This paper aims to analyze the interaction between fiscal-monetary policy after Indonesian institutional transformation in 1999 and its impact on GDP. Using Vector Autoregression approach, this study utilizes 7 variables from 1999 Q2 – 2019 Q4: government revenue, spending and financing as fiscal policy variables, interest rate and money supply as monetary policy variables, GDP as macroeconomic variable, and CPI to deflate all variables. This study showed that fiscal and monetary policy in Indonesia tend to have a mixed interaction: the fiscal and monetary authorities not only jointly implementing the same expansionary or contractive policy but also mutually substitute or implementing opposing policies in the same time. In terms of interactions with GDP, fiscal policy showed a stronger and more direct influence rather than monetary policy. Increasing government spending and money supply while reducing or at least maintaining the stability of government revenues, government financing, and interest rates are the best policy mix to support GDP growth in the short run. In the long run, all variables in the study, except money supply, support GDP growth. The results emphasize the importance of strengthening policy framework and coordination to achieve optimal GDP growth.