The Impact of Monetary Policy on Fiscal Policy Effectiveness During Recession: A Study of Triplet Recessions in Indonesia

Abstract

The main objective of this research is to examine how monetary policy contributed to the effectiveness of fiscal policy throughout Indonesia’s triplet recession. The recession brought on by the Global Financial Crisis (GFC) from 2008Q2 to 2009Q2, exchange rate volatility (ERC) from 2012Q4 to 2015Q2, and the COVID-19 pandemic from 2019Q4 to 2021Q4 are all included in the triplet recession. Another goal is to examine how the crisis affected the efficacy of fiscal policy. The System Equation Full Information Maximum Likelihood (FIML) is used to estimate using quarterly data from 2005Q3 to 2021Q4. According to the results, fiscal effectiveness significantly decreased during the COVID-19 pandemic but not during the GFC or the ERC. The paper also concludes that, unlike during the GFC and ERC, monetary policy significantly preserved the efficacy of fiscal policy throughout the COVID-19 pandemic. We recommend that, in a crisis, fiscal and monetary policies be closely aligned to support each other. They should be flexible in adjusting the balance between fiscal and monetary policies based on the type of crisis.