Fiscal and monetary dynamics: A policy duo for the Indonesian economy

Research on how monetary and fiscal authorities can and should interact has been abundant internationally; however, the amount of research is still small in Indonesia. One consensus that converges from the research is the importance of coordination between monetary and fiscal authorities for an optimal inflation rate and economic growth as well as to minimise welfare losses. What has not yet been observed is the optimal level of monetary and fiscal policy pertaining to monetary and fiscal policy interaction, which is the focus of this research. In a non-cooperative game theory model, we used a loss function of monetary policy, which uses the Surat Berharga Bank Indonesia (SBI) rate as its instrument, and fiscal policies with government spending as their tool, as the payoff for each authority. In general, the result shows that the actual SBI rate and government expenditure have yielded in non-Nash equilibrium and non-Pareto efficiency equilibrium. Thus, there is much room to improve the policies, especially the smoothing of government expenditure throughout the year; that is, improving government expenditure absorption in the second quarter and moderating it in the third and fourth quarters, as well as lowering SBI rates.