Fiscal and Monetary Policy, Output and Price in Indonesia: An Effectiveness Approach

The purpose of this research is to analyze the most effective policy on output and price. From several literature studies that have been done by many economists only see the effectiveness of fiscal and monetary policy on output alone. No authors find the effectiveness of fiscal and monetary policy on prices. Though macroeconomic variables are not only output but there are many other macroeconomic variables. One such macroeconomic variable is price. The data in this study is in the form of time series from 1970-2015. Fiscal policy uses data of real government expenditure, monetary policy uses real money supply data, output use real GDP data, and prices using Consumer Price Index data (CPI). Data analysis techniques use Vector Auto Regressive (VAR), Impulse Response Function (IRF) and Forecast Error Variance Decomposition (FEVD). A policy is said to be effective if the FEVD method shocks one policy against output variability and the price is greatest compared to other policies. The conclusions of this study indicate that Fiscal Policy is more effective against output and prices in Indonesia compared to Monetary Policy. The effectiveness of Fiscal Policy compared to Monetary Policy can be seen from the contribution of shock Fiscal Policy to the variability of output and prices greater than Monetary Policy. Based on these conclusions, it is suggested to the government through the relevant ministries and Bank Indonesia always maintains the interaction and synergy between Fiscal Policy and monetary to macroeconomic variables.