Fiscal and Monetary Policy Interactions in Support of Economic Sustainability in Indonesia and Thailand
Julie Ann Q. Basconcillo, Rudi Purwono, Unggul Heriqbaldi

Department of Economics, Universitas Airlangga, Surabaya, Indonesia

Abstract

This study examines the interactions between fiscal and monetary policies and how they support macroeconomic stabilization under inflation targeting framework in Indonesia and Thailand. The model consists of two exogenous variables (world commodity inflation and foreign interest rate) and eight endogenous variables (tax ratio, government spending, output gap, inflation, debt ratio, policy rate, exchange rate, and private consumption) from 2002:Q1 to 2022:Q4. Using a non-recursive small open-economy structural VAR model, the impulse responses show that government spending shocks contribute to inflationary pressure which is quite persistent in Indonesia but short-lived in Thailand. Surprisingly, the responses of inflation to debt shocks vary: inflation increases in Indonesia whereas it declines in Thailand. To offset the inflationary impact of fiscal expansion, Indonesia tightens monetary policy whereas Thailand tends to accommodate it. Yet, the results suggest a weakening of monetary policy transmission. Private consumption increases only marginally in response to both monetary and fiscal policy shocks.

Keywords: fiscal policy- monetary policy- structural VAR- inflation, ERPT

Topic: Monetary economics