Commodity Price and Indonesian Fiscal Policy: An SVAR Analysis with Non-Gaussian Errors

This study exploits the non-Gaussianity for identification of a Bayesian SVAR model on newly unexplored monthly Indonesian data from 2007M1-2022M12, where we disentangle the commodity-related revenue from the total government revenues. Our main contribution is in labeling the statistically identified structural shocks as economic shocks by conducting a formal assessment of a set of proposed sign constraints. We simultaneously label a commodity price and three fiscal policy shocks, i.e. fiscal income tax, investment-spending, and consumption-spending shocks. Having evaluated their impacts, among the fiscal policy shocks, we find income tax shock the most impactful on output. Moreover, during the Covid crisis 2020-2021, the launched fiscal economic stimulus package (PEN program) positively contributed to the output. The recession of the Covid crisis could have deepened had the fiscal policymaker not responded at all. Albeit so, we should not overlook the contribution of the rising commodity prices to the output recovery. We also evaluate the commodity boom period in 2007-2009, the tax amnesty program in 2016-2017 and 2022, and the infrastructure spending boost in 2015. Our results suggest that output and retail sales would have been lower without the commodity price shock's contribution during the commodity boom. Then, we find that tax amnesty and infrastructure spending boost policies contribute to higher retail sales.