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Review of Economic Perspectives

Národohospodárský obzor; The Journal of Masaryk University

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1804-1663
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Volume 15, Issue 2 (Jun 2015)

Issues

Does the Credible Fiscal Policy Support the Prices Stabilization?

Haryo Kuncoro
Published Online: 2015-07-16 | DOI: https://doi.org/10.1515/revecp-2015-0014

Abstract

This paper aims at analyzing the co-movement between fiscal policy and monetary policy rules in the context of price stabilization. More specifically, we observe the potential impact of fiscal policy credibility on the price stabilization in the inflation targeting framework. Motivated by the fact that empirical studies concerning this aspect are still limited, we take the case of Indonesia over the period 2001-2013. Based on the quarterly data analysis, we found that the impact of credibility typically depends on characteristics of fiscal rules commitment. On one hand, the credibility of debt rule reduces the inflation rate. In contrast, the incredible deficit rule policy does not have any impact on the inflation rate and therefore does not support to inflation targeting. Given those results, we conclude that credibility matters in stabilizing price levels. Accordingly, those findings suggest tightening coordination between monetary and fiscal policy to maintain fiscal sustainability in accordance with price stabilization policy

Keywords: Fiscal Rules; Deficit; Debt; Credibility; Inflation Rate

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About the article

Published Online: 2015-07-16

Published in Print: 2015-06-01


Citation Information: Review of Economic Perspectives, ISSN (Online) 1804-1663, DOI: https://doi.org/10.1515/revecp-2015-0014.

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© by Haryo Kuncoro. This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License. BY-NC-ND 3.0

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