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Masagus M. Ridhwan and Pakasa Bary

This chapter attempts to examine the effects of macroeconomic shocks across Indonesian regions. In doing so, we have developed structural macroeconomic models for 32 provinces, which are later estimated by around 28 pairs of ECM-based equations which represents demand-side output, supply-side output, monetary, fiscal, and prices in each economy. The responses are specifically evaluated due to four types of main shocks that are originated from both domestic economy based on credit volumes and administered price inflation, while from external shocks we use world output and exchange rate shocks, respectively. Our findings indicate there are systematic differential responses to the common shocks on both provincial output and inflation, that may well be related to the individual provincial economic structures and its specific characteristics. Java – the most developed and diversified economy – tends to be more resilient to the shocks relative to the off-Java regions. The models and estimation results tend to be robust by fulfilling classical econometrics assumptions and well-present the standard macroeconomic theory. The results also assert the importance of regional economic structures and characteristics in formulating nationwide macroeconomic policy.