Fiscal Resilience Index - A Proposition and Evidence of Emerging Market

Abstract

Fiscal resilience is essential to maintain economic stability and sustainability. Until now, there are no mutually agreed indicators to show a country's fiscal resilience. This study aims to explore the possibility of forming the index of fiscal resiliency that captures more than one underlying variable that are more comprehensive as opposed to the most current practices that use only one narrow variable. The Principal Component Analysis (PCA) method is applied to build the foundation of the index, whilst the trial is experimentally conducted as a case study of Indonesia as an emerging market in 1995-2020. Using the PCA method produces an index model of fiscal resiliency formed by the variables of government revenue, spending, debt, and macroeconomic conditions. The use of such Fiscal Resilience Index (FRI) as the case of Indonesia in the period 1995-2020 shows a reasonably consistent result which is in line with the underlying condition of the country during such period. It gives a negative figure, which means Indonesia is in a bad fiscal condition due to its budget deficit strategy.