Abstract
This paper analyzes the fiscal risk and its determinants in Indonesia. It estimates a Value-at-Risk (VaR) based on the debt
ratio using Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model for the data 1991-2016. This research
also evaluates the response of the fiscal policies to the debt ratio volatility. We apply fiscal reaction function to capture the
relationship between that variable and other variables namely primary balance, output gap, and seignorage. The research
finds a risky situation in 1999 following the 1998 Asian crises and another risky in 2008 following the crash in the US capital
market. It also reveals slow response of fiscal adjustment to the debt risk in the country. The primary balance model indicates
that fiscal policies do not adjust effectively to the short run fiscal imbalance. This paper concludes that fiscal capacity
improvement and debt risk reduction are main challenges to achieve better fiscal sustainability. The government needs to
improve the quality of its budget governance both in primary deficit and debt management.
Original language | English |
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Pages (from-to) | 1668-1679 |
Journal | Journal of Applied Economic Sciences |
Volume | 12 |
Issue number | 6 |
Publication status | Published - 2017 |