An Evaluation of Fiscal Policy Response to Economic Cycles
Two conditions should be satisfied if fiscal policy is to stabilize economic cycles; proper policy timing and significant policy effect. This paper evaluates whether the policy timing has been proper in Korea by investigating the correlation between fiscal policy stance and economic conditions. We f...
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Format: | Article |
Language: | English |
Published: |
Korea Development Institute
2006-12-01
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Series: | KDI Journal of Economic Policy |
Subjects: | |
Online Access: | https://doi.org/10.23895/kdijep.2005.28.2.51 |
Summary: | Two conditions should be satisfied if fiscal policy is to stabilize economic cycles; proper policy timing and significant policy effect. This paper evaluates whether the policy timing has been proper in Korea by investigating the correlation between fiscal policy stance and economic conditions. We first calculate quarterly FIs (Fiscal Impulse) using the estimated potential GDP and fiscal balance data. Based on these indices, we 1) analyze how FIs respond to the economic conditions summarized in GDP gap through regression analysis, 2) compare average FIs in expansionary and recessionary periods according to the NSO's economic cycles, 3) evaluate fiscal policy maker's perception of economic conditions and its intention by reviewing the budget proposals. Although regression analysis shows that overall fiscal policy, especially expenditure side, has properly responded to economic conditions, average FIs do not show the significant difference between expansionary and recessionary periods. It is inconclusive whether the fiscal policy timing has been proper. Budget proposals show that actual fiscal policy stance has been sometimes inconsistent with the policy intention, which implies that it is hard to utilize fiscal policy actively to stabilize the economy. |
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ISSN: | 2586-2995 2586-4130 |