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Effect of Monetary Policy on Government Spending Multiplier

Author

Listed:
  • Han Jong-Suk

    (Department of Economics, Ajou Unversity, 206, Worldcup-ro, Yeongtong-gu, Suwon-si, Gyeonggi-do, 16499, Republic of Korea)

  • Hur Joonyoung

    (School of Economics, Sogang University, 35, Baekbeom-ro, Mapo-gu, Seoul, 04107, Republic of Korea)

Abstract

This paper empirically examines the effect of monetary policy on the government spending multiplier when the nominal interest rate is not bound to zero. We estimate a time-varying coefficient vector autoregressive (TVC-VAR) model using 2000:Q1 to 2019:Q3 quarterly data of Korea, whose policy rate is distant from zero. We find a substantial degree of time variation in the medium-run government spending multipliers, which increase over time and become statistically different from zero throughout the 2010s. Yet the reverse pattern is observed in the policy rate responses to government spending shocks, decreasing gradually until 2008–09 and then stagnating for the subsequent period. Decompositions of the policy rate responses reveal that inflation is an important ingredient in determining the responses of the nominal interest rate to government spending shocks, and thus has a critical impact on the size of government spending multipliers. In particular, our finding underscores a substantial role of the monetary policy stance against inflation in shaping government spending multipliers.

Suggested Citation

  • Han Jong-Suk & Hur Joonyoung, 2023. "Effect of Monetary Policy on Government Spending Multiplier," The B.E. Journal of Macroeconomics, De Gruyter, vol. 23(1), pages 57-93, January.
    • Handle: RePEc:bpj:bejmac:v:23:y:2023:i:1:p:57-93:n:8
    DOI: 10.1515/bejm-2020-0229
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    More about this item

    Keywords

    government spending multiplier; monetary policy; time-varying coefficient VAR;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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