Impacts of Macroeconomic Forces and External Shocks on Real Output for Indonesia

Extending Romer (2000, 2006) and Taylor (1993, 1999, 2001), this paper applies the IS-MP model to study potential impacts of selected macroeconomic variables and external shocks including crude oil prices on real GDP for Indonesia. The results show that a higher real stock price, real appreciation of the rupiah, a lower inflation rate, a higher real crude oil price, and a lower real federal funds rate are expected to increase Indonesia’s real GDP. More deficit spending as a percent of GDP would not cause real output to rise. Hence, Indonesia would not suffer declining output because of higher oil prices. Due to the insignificant coefficient of the government deficit as a percent of GDP, fiscal prudence needs to be pursued.