Chapter

Measuring the Effectiveness of Fiscal Policy in Korea

Seok-Kyun Hur

in Fiscal Policy and Management in East Asia

Published by University of Chicago Press

Published in print November 2007 | ISBN: 9780226386812
Published online February 2013 | e-ISBN: 9780226387062 | DOI: http://dx.doi.org/10.7208/chicago/9780226387062.003.0004
Measuring the Effectiveness of Fiscal Policy in Korea

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This chapter examines whether fiscal adjustments can contribute to smoothing economic fluctuations, focusing on Korea. There have been two competing views on this issue, one of which—known as Keynesian—emphasizes the effectiveness of fiscal policy, and the other of which—the so-called new classical school—refutes it on the grounds of the crowding-out effect and Ricardian equivalence. The chapter focuses on a trajectory of GDP induced by variations in fiscal expenditure and taxation policy. It estimates three variable vector autoregression models or structural VAR models with Korean fiscal data in order to measure the magnitudes of fiscal multipliers dynamically following changes in fiscal expenditure and taxation. However, the quarterly Korean fiscal and GDP data (covering the period from 1979 Q1 to 2000 Q4) reveal that expansive fiscal policy has no significant or substantial effect on boosting the economy. In order to check the robustness of these results, the chapter considers different combinations of identifying restrictions on the disturbances of the tested structural VAR systems and measures the corresponding fiscal multipliers.

Keywords: Korea; fiscal policy; fiscal multipliers; GDP; economic fluctuations; taxation; vector autoregression models

Chapter.  11372 words.  Illustrated.

Subjects: Business and Management

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