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Countering the Cycle

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  • Leif Lybecker Eskesen
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    Abstract

    The Korean authorities having taken decisive and proactive fiscal measures to help stem the fallout from the current global economic and financial crisis, with the size of the fiscal stimulus well-above the average response of other G20 economies. In this context, a key question is how effective fiscal policy is as a stabilization tool, especially considering the high openness of Korea''s economy. Results based on a macroeconomic model calibrated for Korea provide a strong case for using counter-cyclical fiscal policy, especially if measures appropriately focus on spending with a direct demand impact such as investment and targeted transfers. It also demonstrates the importance a complementary monetary response and the benefits to an open economy such as Korea''s of global coordination of fiscal stimulus.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/249.

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    Length: 28
    Date of creation: 01 Nov 2009
    Date of revision:
    Handle: RePEc:imf:imfwpa:09/249

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    Related research

    Keywords: Global Financial Crisis 2008-2009; Government expenditures; National income; Public investment; fiscal policy; fiscal stimulus; fiscal measures; investment spending; marginal propensity to consume; fiscal multipliers; government spending; the marginal propensity to consume; aggregate demand; fiscal balance; tax cuts; labor income; cyclical fiscal policy; structural fiscal; consumption goods; fiscal sustainability; budget constraint; fiscal response; taxation; real interest rate; consumption taxes; tax rates; consumption tax; private consumption; general equilibrium; aggregate consumption; fiscal position; capital accumulation; tax rebates; fiscal consolidation; tax income; public sector solvency; substitution effect; reduction in consumption; taxes on labor; consumption good; tax cut; fiscal expansion; fiscal policy responses; fiscal policies; tax credit; disposable income; central government spending; fiscal stance; fiscal deficits; fiscal revenues; fiscal actions; aggregate income; capital income; tax bases; tax revenue; temporary tax; increase in consumption; budget deficits; government budget constraint; tax credits; discretionary fiscal policy; public debt; fiscal policy targets; current income; expansionary fiscal; fiscal prudence; household wealth; expansionary fiscal stance; household income; government expenditure; tax payments; fiscal implementation; business cycles; fiscal loosening; fiscal revenue; tax collections; consumption spending; income effect; government budget; consumption demand; fiscal impulse; current consumption;

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    1. Douglas Laxton & Paolo Pesenti, 2003. "Monetary Rules for Small, Open, Emerging Economies," NBER Working Papers 9568, National Bureau of Economic Research, Inc.
    2. Baxter, Marianne & King, Robert G, 1993. "Fiscal Policy in General Equilibrium," American Economic Review, American Economic Association, vol. 83(3), pages 315-34, June.
    3. Olivier Blanchard & Roberto Perotti, 1999. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," NBER Working Papers 7269, National Bureau of Economic Research, Inc.
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    9. Douglas Laxton & Michael Kumhof, 2007. "A Party without a Hangover?on the Effects of U.S. Government Deficits," IMF Working Papers 07/202, International Monetary Fund.
    10. Adam S. Posen, 1998. "Restoring Japan's Economic Growth," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 35.
    11. Dennis P. J. Botman & David Rose & Douglas Laxton & Philippe D Karam, 2007. "DSGE Modeling At the Fund," IMF Working Papers 07/200, International Monetary Fund.
    12. Roberto Perotti, 2004. "Estimating the effects of fiscal policy in OECD countries," Working Papers 276, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    13. Linnemann, Ludger & Schabert, Andreas, 2003. " Fiscal Policy in the New Neoclassical Synthesis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(6), pages 911-29, December.
    14. Perotti, Roberto, 2005. "Estimating the Effects of Fiscal Policy in OECD Countries," CEPR Discussion Papers 4842, C.E.P.R. Discussion Papers.
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