Inflationary effects of fiscal and monetary policies in Indonesia

Abstract

This paper analyzes the effects of fiscal and monetary policies on inflation rate in Indonesia. This research uses the error correction model for estimating the empirical model of inflation rate for annual data 1970-2017. The results present the significant effects of fiscal and monetary variables on the inflation rate. These findings reveal the inflationary effects of fiscal and monetary policies in the country. This research also finds the impact of output and exchange rate on inflation rate. Therefore, this paper supports the theory of demand-pull inflation as well as the proposition of imported inflation. The other uniqueness of this research is the inclusion of shock variables in the empirical model. This study asserts the significant role of inflation shock and unanticipated exchange rate on the domestic price level. It implies that domestic inflation is closely related to the international financial sector.