Table of Contents

ABSTRACT

The revocation of gasoline subsidies in Indonesia, analyzed through various econometric methods, reveals significant impacts on the country’s economic landscape. Using the Mundell-Fleming theory, which explores the interaction between exchange rates, fiscal policies, and macroeconomic outcomes, this study examines the effects of subsidy removal on key economic indicators such as inflation, exchange rates, exports, and GDP. A combination of statistical tools, including the Chow Breakpoint Test, Difference-in-Differences (DID), and Propensity Score Matching (PSM), was employed for robust analysis. Results show that the termination of gasoline subsidies led to a sharp rise in inflation and a depreciation of the Indonesian rupiah, negatively affecting exports and GDP. These findings affirm the Mundell-Fleming theory’s prediction that fiscal policy changes can lead to price level adjustments and exchange rate fluctuations. The study underscores the critical need for policymakers to carefully assess subsidy reforms, as they have far-reaching implications on national economic stability. Additionally, it calls for effective mitigation strategies to manage inflationary pressures and support economic growth post-subsidy reform.

Keywords: subsidy, mundell-fleming theory, fiscal policies, econometric modelling

JEL Classification Code: H31, E62, F41, O53