Asymmetric responses of fiscal policy to the inflation rate in Indonesia

This paper examines the responses of fiscal policy to the inflation rate in Indonesia based on the annual data from 1971 to 2017. We use a nonlinear autoregressive distributed lag model (NARDL) to investigate the pattern of those responses. This study finds the existence of a long-run equilibrium relationship among set variables of the budget deficit, government spending, and inflation rate. The results also reveal asymmetric responses of both fiscal variables to the inflation rate in short and long-run models. We also assert that government spending contributes higher than budget deficit on the increase in the inflation rate. These findings fill the literature regarding the empirical findings of asymmetric effects of fiscal policy on the inflation rate. This paper also concludes the important role of the fiscal policy on the price stabilization through government spending management. It implies that the central government should review the quality of government spending allocation in all sectors to eliminate inflationary effects of various fiscal policies.