Fiscal and Monetary Policy Mix in the Indonesian Economy: A Theoretical Review

Ardianta Selasa, September 01, 2026
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FORMOSA NEWS

Strategic Fiscal and Monetary Policy Mix Essential for Indonesian Economic Stability

JAKARTA, Formosa News — Coordinating expansionary fiscal policy with contractionary monetary policy provides the most effective framework for maintaining macroeconomic stability in Indonesia. A 2026 theoretical review published by researchers Putu Krisna Adwitya Sanjaya and Ni Wayan Dinda Lestari Adiloka from Udayana University, alongside Gede Agus Dian Maha Yoga from the Indonesian Hindu University, demonstrates how synchronized economic policies manage aggregate demand to stabilize national output. Published in the Indonesian Journal of Economic & Management Sciences (IJEMS), the study provides critical insights into tackling systemic economic fluctuations, suppressing unemployment, mitigating inflation, and stabilizing Indonesia's balance of payments.

Background: Navigating Post-Pandemic Economic Pressures

Maintaining macroeconomic equilibrium remains a central challenge for developing economies facing global market volatility. Official national statistics reflect Indonesia's ongoing economic dynamics. Real Gross Domestic Product (GDP) rose from IDR 12,301.5 trillion in 2023 to IDR 12,920.3 trillion in 2024. By 2025, real GDP growth reached 5.11%, inflation stood at 2.92%, and the open unemployment rate dropped to 4.74%, representing approximately 7.35 million unemployed individuals.

Despite positive growth indicators, structural challenges persist. The informal sector continues to employ over 57% of the workforce, while youth unemployment among individuals aged 15 to 24 remains disproportionately high. Furthermore, the Indonesian Rupiah experienced significant depreciation against the US Dollar, fluctuating between IDR 16,475 and IDR 16,800 per USD by late 2025.

Achieving economic stability requires overcoming institutional frictions between policy bodies. Fiscal authorities, such as the Ministry of Finance, and monetary authorities, such as Bank Indonesia, frequently operate under different organizational mandates, theoretical models, and forecasting tools. For instance, central bankers may view fiscal tax cuts as potential deficit risks, whereas fiscal planners view them as essential growth catalysts. Resolving these conflicting priorities through a synchronized policy mix is vital for national economic resilience.

Simplified Methodology: Macroeconomic Framework Analysis

The research team conducted a comprehensive theoretical literature review to evaluate policy mix interactions within Indonesia's open economy. Using the classic IS-LM model alongside the Mundell-Fleming framework, the study systematically evaluated how fiscal tools (government expenditure and taxation) and monetary tools (money supply adjustments and interest rate management) influence internal and external economic equilibrium. The analysis specifically examined policy interactions under fixed and flexible exchange rate regimes to assess their capacity to stimulate national income without triggering hyperinflation.

Key Research Findings

The study by Udayana University and Indonesian Hindu University researchers outlines several core findings regarding policy synergy:

  • Optimal Income Growth via Policy Mix: Combining an expansionary fiscal policy (increased public expenditure or tax reductions) with a contractionary monetary policy (restricted money supply) successfully raises national income while adjusting interest rates to maintain balance of payments equilibrium.
  • Exchange Rate Regime Dependency: The policy combination of fiscal expansion and monetary tightening achieves maximum effectiveness in driving national income under a fixed exchange rate system.
  • Bank Indonesia's Allocation Role: Monetary policy in Indonesia extends beyond managing aggregate demand; Bank Indonesia's targeted financial resource allocation actively supports high-multiplier, labor-intensive productive sectors.
  • Risks of Uncoordinated Policies: Unilateral tightening or contradictory fiscal measures—such as sudden tax hikes combined with fuel subsidy cuts—risk prolonging economic instability, raising unemployment, and exacerbating inflationary pressures.
  • Importance of Socio-Political Stability: Fiscal and monetary policies require strong legal enforcement, public safety, and political stability to sustain foreign direct investment and bolster investor confidence.

Real-World Implications for Policymakers and Industry

The findings offer clear actionable guidance for national economic governance and private sector planning. For government bodies and central bankers, policy coordination prevents conflicting interventions that could undermine economic recovery. Targeted government spending on strategic infrastructure and social safety nets maintains domestic purchasing power without weakening currency stability.

For businesses and international investors, a transparent and coordinated macroeconomic policy mix provides interest rate predictability and reduces market uncertainty. Additionally, maintaining socio-political stability during electoral cycles protects foreign direct investment flows and reinforces capital formation.

"Expansionary fiscal policy combined with contractionary monetary policy facilitates the achievement of four major macroeconomic objectives: high economic growth, low inflation, lower unemployment levels, and improved balance of payments conditions," highlighted lead researcher Putu Krisna Adwitya Sanjaya and his colleagues.

Author Profiles

  1. Putu Krisna Adwitya Sanjaya, S.E., M.Si. — Lead author and academic researcher at the Faculty of Economics and Business, Udayana University. Specializes in macroeconomic theory, monetary economics, and empirical time-series analysis.
  2. Gede Agus Dian Maha Yoga, S.E., M.Si. — Co-author and faculty member at the Faculty of Economics, Business and Tourism, Indonesian Hindu University. Focuses on business economics, financial management, and regional development.
  3. Ni Wayan Dinda Lestari Adiloka, S.E., M.Si. — Co-author and researcher at the Faculty of Economics and Business, Udayana University. Expert in public policy evaluation and macro-financial development.

Research Source

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