• KDI Journal of Economic Policy
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• v.13 no.4
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• pp.141-153
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• 1991

The optimal choice of the tax rate and the inflation rate framework is extended to yield relevant interpretations for the optimal fiscal and monetary policy regime in Korea. To study the relationship between the government budget and monetary growth in different environments of policy coordination, two models assuming different degrees of fiscal dominance are developed. By modelling differing institutional arrangements of the fiscal and the monetary authority from an optimal government finance viewpoint, we find the optimal relationship among some important fiscal and monetary variables. By testing the existence of the relationship empirically, we find the characteristics of the optimal policy-mix regime in Korea. The first model-the strong from of fiscal dominance-studies the optimal collection of seigniorage in a period-by-period optimization with standard assumptions on the income velocity of money, deriving a general testable result: the optimal inflation/tax rate ratio co-vary with the marginal revenue ratio. The second model-the weak form of fiscal dominance-studies an implication of the inflationary bias of discretionary monetary policy in the presence of fiscal side distortions. This model shows that the tax rate and the inflation rate can have a positive correlation. Empirical tests of the theoretical results are done for the Korean economy for 1972-1989 period. The test results show that the macroeconomic policy regime in Korea can be characterized by the strong form of fiscal dominance, implying the importance of the government budget in explaining money growth and inflation.

• The Journal of Asian Finance, Economics and Business
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• v.9 no.6
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• pp.245-252
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• 2022

This study examines the strength of the impact of fiscal policy tools on economic wellbeing as measured by per capita income in Malaysia from 1996 to 2020. The impact of fiscal policy instruments on economic wellness, represented by real income per capita, is measured using the autoregressive distributed lags model. The speed of adjustment from short-run disequilibrium to long-run equilibrium is also measured to assess the strength of the fiscal instruments' impact on per capita income. Empirical results exhibit the existence of co-integration relationships between per capita income, tax revenue, and government spending. The findings provide strong support for the presence of a long-run positive impact on government spending and a long-run negative impact of tax revenue on per capita income. The coefficient of ECT_t-1 indicates that deviations from a short-run disequilibrium to a long-run equilibrium from the current to the future period are corrected with a speed of 76% (equivalent to a duration of 1.5-2 years to return to equilibrium). The practical and policy implication of the results is fiscal instruments play a significant role, mainly in alleviating the economic impact of the COVID-19 pandemic in the long run.

• KDI Journal of Economic Policy
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• v.29 no.2
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• pp.1-40
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• 2007

This paper mainly estimates a trajectory of GDP induced by variations in fiscal expenditure and taxation policy using three variable structural VAR models. By assigning different combinations of identifying restrictions on the disturbances and measuring the corresponding fiscal multipliers, we compare how robust the estimated values of fiscal multipliers are with respect to the restrictions. Then, considering the dependency of Korean economy on the foreign sector, we extend the three variable SVARs to four variable ones by adding a variable reflecting external shocks. Empirical analyses into the Korean quarterly data (from 1979 to 2000) with the three variable SVARs reveal that the size and the significance of the estimated fiscal multipliers in Korea are very small and low or they decay very fast. Results from the four variable SVARs confirm these results while the significance of the effectiveness of fiscal policy is enhanced in some cases.

• KDI Journal of Economic Policy
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• v.45 no.3
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• pp.25-48
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• 2023

The current article has explored the effect of productive capacities (as defined by the United Nations Conference on Trade and Development) and of structural economic vulnerability (as defined by the United Nations) on fiscal space volatility in developing countries. It relies on the definition and measure of fiscal space proposed by Aizenman and Jinjarak (2010; 2011) and Aizenman et al. (2019). To compute the indicator of fiscal space and hence that of fiscal space volatility, fiscal space is considered as the ratio of outstanding public debt to the 'de facto tax base', the latter being the number of years of tax revenues needed for a country to repay its debt. Results based on a sample of 116 countries from 2000 to 2018 have revealed that the enhancement of productive capacities is associated with lower fiscal space volatility, while higher structural economic vulnerability heightens fiscal space volatility. On another note, highly vulnerable countries tend to experience a higher negative effect of productive capacities on fiscal space volatility than relatively less vulnerable countries.

• KDI Journal of Economic Policy
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• v.35 no.2
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• pp.71-105
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• 2013

Now that fiscal soundness is increasingly important influenced by the euro area fiscal crisis, early budget execution has been under the spotlight as a tool for economy control, other than typical expansionary method, such as supplementary budget. Basically, early budget execution is a fiscal policy instrument that reponses to economic fluctuations through modifying the inter-temporal allocation of fiscal expenditure within budget, without affecting fiscal soundness. This study empirically examines how effective the intert-temporal reallocation of fiscal expenditure is in economy control. Using Korea's Consolidated Fiscal data, the size of inter-temporal reallocation of fiscal expenditure is defined as changes of fiscal expenditure for one year excluding seasonal factors and used to explain real economic growth rate, a dependent variable. The result shows that the macroeconomic effect of the inter-temporal reallocation turns out meaningful in general, though some policy time lag exists. Meanwhile, a simulation using macroeconomic model finds that overall effect on economic growth is not large because increase in fiscal expenditure allocation at a certain point of time is canceled by the opposite direction within the same fiscal year. However, the inter-temporal reallocation is found to reduce volatility of key macroeconomic variables so as to contribute to partially stabilizing macroeconomy. In particular, such effect of economic stabilization seems to be highly apparent at the time of financial crisis, but not very noticeable in normal economic cycle.

• 한국사회정책
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• v.24 no.4
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• pp.185-222
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• 2017

The purpose of this study is to investigate the effect of labor market policy on fiscal soundness of welfare state. The analysis was carried out using cross-sectional panel data regression analysis, stepwise mediating effect analysis and system GMM designed by Baron and Kenny(1986) based on the data from 1985 to 2015 for 20 OECD countries. In setting up the analysis model, this study considers the interaction effect between active and passive labor market policies as well as the time sequence of the outcomes which have been overlooked in the previous studies. The result shows that labor market policies have significant impacts on the fiscal condition of welfare states, which is measured as the levels of national debt in this study. Especially the expenditure on active labor market programs has a positive effect on improving the fiscal soundness of welfare states by promoting the employment rate. In contrast, passive labor market programs expenditure is negatively associated with employment rate growth and it exacerbates the burden of national debt in the short-term. However, when active labor market programs and passive labor market programs are combined, the negative impacts by passive pabor market policies on the fiscal soundness of welfare states are off-set. Therefore this study addresses that although the expansion of the labor market policies can be inimical to the fiscal soundness of welfare states in the short-term, in the long run, they can have effective roles in securing and promoting the fiscal soundness of the welfare states by promoting the employment rate.

• KDI Journal of Economic Policy
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• v.44 no.3
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• pp.49-74
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• 2022

This paper empirically examines how fiscal instability affects financial instability. According to an IMF forecast (2021a), the fiscal space in Korea will be steadily reduced in the future. The theoretical literature predicts that if fiscal stability is undermined, financial stability will also be in danger given that government guarantees on banks are weakened and/or sovereign bonds held in banks become riskier. This paper empirically finds the existence of this negative impact of fiscal instability on financial instability. I also find that the intensity of this fiscal-financial relationship is greater in a country where (i) its currency is not a reserve currency such as the US dollar or euro, (ii) its banking sector is large relative to government sector, and/or (iii) its private credit to GDP is high. Korea has all of these three characteristics and hence needs to put more effort into maintaining fiscal stability.

• Asia-Pacific Journal of Business
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• v.14 no.4
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• pp.319-330
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• 2023

Purpose - The purpose of this paper is to examine the connectedness between categorical economic policy uncertainty (monetary, fiscal, trade and foreign exchange policy uncertainty) indexes and option-implied volatility index in Korea, Japan and the US. Design/methodology/approach - This paper employs the Diebold-Ylmaz (2012) model based on a VAR and generalized forecast error variance decomposition. This paper also conducts regression analyses to investigate whether the volatility indexes are explained by categorical policy uncertainty indexes. Findings - First, we find the total connectedness is stronger in Korea and Japan relative to the US. Second, monetary, fiscal, and foreign exchange policy uncertainty indexes are connected to each other but trade policy uncertainty index is not. Third, the volatility index in Japan and the US is mainly associated with monetary policy uncertainty while the volatility index in Korea is explained by fiscal policy uncertainty index. Research implications or Originality - To our knowledge, this is the first study to investigate the connectedness among categorical policy uncertainty indexes and the volatility index in Korea, Japan, and the US. The empirical results on the connectedness suggest that transparent policy and communication with the market in one type of policy would reduce the uncertainty in other policies.

• Korea journal of population studies
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• v.14 no.2
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• pp.1-17
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• 1991

While various fiscal measures have been used to influence regional capital inflow or industrial location, the effect of fiscal variables on labor mobility has been little understood. Understanding the relationship between the composition of local public and urban migration would enhance the city govenment's ability to pursue an appropriate population policy. In order to examine the potential for local public finance to be utilized as a policy tool in directing urban population growth, this paper analyzes the impact of local government financial structure on urban migration. In examining the data on local government finance and the changes in population of Korean cities during the last ten years, it was found that cities with high per capita expenditure in regional development have experienced high population growth rates. In this study migration equations were constructed using various fiscal variables such as the proportion of special account expenditures which are mostly spent for local development purposes, per capita regional development expenditure, degree of local financial independence and per capita net fiscal benefit, along with other explanatory variables. The results of regression analysis showed that city government's regional development expenditure variables have a positive effect on urban net migration and a negative effect on outmigration. Fiscal independence and per capita net fiscal benefit had mixed effects on in and out migration variables, implying that local tax burden does not consistently deter inmigration or induce outmigration. Based on the results of this study some important policy implications can be found regarding local government's fiscal policies. Those cities seeking to attract higher population inflow should make a greater effort in appropriating local expenditures for regional development purposes such as infrastructure, housing, and transportation. city governments should not be too concerned about high local tax burden or necessarily seek to enhance financial independence for these factors do not exert a clear influence on urban population growth or labor supply.

• KDI Journal of Economic Policy
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• v.23 no.1_2
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• pp.71-147
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• 2001

The structural balance is obtained by neutralizing the impact of economic cycles on the actual balance. It is often used as an indicator of the long-term stability of government finance and as a measure of fiscal stance. Many countries nowadays produce and report the estimates of their structural balances regularly, and the IMF recently advised the Korean government to adopt this practice for better fiscal transparency. This paper surveys the methodologies employed by the OECD secretariat and the IMF to estimate structural balances and apply them to the Korean data. It then computes the fiscal impulse indicator (FI) and suggests a decomposition of FI into the changes in structural expenditures and revenues. In addition, primary and operational balances are estimated. The estimated series of structural balances, one by the OECD methodology and the other by the IMF, show no sizable difference from each other. These series also follow the actual series of budget balance quite closely. The latter characteristic stems from two factors, namely the rather small GDP gap and the rather small size of the tax revenue as a share of GDP. The impulse indicator estimated for the last three decades indicates that the fiscal stance in Korea contributed to smoothing the economic cycles in about half of the times. In particular, the fiscal tightening in the early 1980s to reduce inflation resulted in a pro-cyclical movement in fiscal stance as did the expansionary policy in the early 1990s. The overall performance, however, is not bad when compared with those of other countries.