Is Currency Depreciation or Deficit Spending Effective for Indonesia? Application of an Extended IS-MP-AS Model
Applying an extended IS-MP-AS model, the paper finds that real appreciation raised real Gross Domestic Product (GDP) during 2000.Q1-2012.Q1 whereas real depreciation increased real GDP during 2012.Q2-2016.Q4 and that a higher deficit/GDP ratio does not influence real output in Indonesia. Moreover, a lower real federal funds rate in the U.S., a higher real stock index, a lower real crude oil price or a lower expected inflation rate would help increase real output. These results suggest that either real depreciation or real appreciation of the rupiah may increase or reduce real output, depending upon the time period under consideration and that deficit-financed expansionary fiscal policy is ineffective due to complete crowding-out effect.
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