The role of inter-household transfers in mitigating the impact of economic shocks on income distribution in Indonesia

Abstract

COVID-19 outbreak has triggered many economic shocks globally. In this study we estimate the role of inter-households transfer in mitigating the impacts of the outbreak on Indonesian economy using a CGE model. The result shows that commodity prices and enactment of physical distancing measures bring negative impacts on the economy. Government response by lowering direct tax rates and increasing transfer to households could not fully compensate the impacts but enlighten it slightly. Households response by increasing inter-household transfers helps the government policy, particularly in reducing the decrease of households' income and consumption. The result indicates that inter-household transfer could be regarded as an effective instrument to improve the household income distribution quality and reduce the poverty. Regarding that, stakeholders in the economy should improve the collaborative policies to capitalize the policy instruments optimally. Furthermore, the result also indicates that household consumption is not a sustainable engine to boost the economic growth. Prioritizing consumption over saving in the long run could lead to inability of the economy to engage a self-financed investment.