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Fiscal Policy Issues in Korea after the Current Crisis

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  • Hong, Kiseok

    (Asian Development Bank Institute)

Abstract

This paper examines fiscal policy issues in the Republic of Korea (hereafter Korea) after the 2009 global financial crisis, including the timing of fiscal policy responses, the effectiveness of expansionary measures, and the long-term implications for government debt. In order to evaluate more accurately Korea's fiscal response since late 2008, this paper conducts an empirical analysis using historical data from Korea and other countries and derives stylized patterns on counter-cyclicality of fiscal policy and its role in the recovery process. The analysis suggests that Korea's fiscal stimulus in 2009, while having contributed greatly to the economy's fast recovery, was unusually large compared with typical fiscal responses during economic downturns. This paper also investigates whether the rapid increase in Korea's fiscal debt burden is admissible in terms of long-term sustainability. Although existing evidence suggests that Korea's fiscal debt is still manageable, the sizeable deficit and the increasing trend in the debt to GDP ratio in recent years call for vigilance. The paper concludes with some suggestions for fiscal consolidation in Korea: a stricter practice of medium-term budget planning, expansion of automatic stabilizers and reduction of discretionary components, use of more comprehensive measures of government debt, and further reforms in the national pension system are discussed.

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File URL: http://www.adbi.org/files/2010.07.02.wp225.fiscal.policy.issues.korea.crisis.pdf
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Bibliographic Info

Paper provided by Asian Development Bank Institute in its series ADBI Working Papers with number 225.

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Length: 26 pages
Date of creation: 02 Jul 2010
Date of revision:
Handle: RePEc:ris:adbiwp:0225

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Keywords: korean fiscal policy; korean government debt; korean economic recovery;

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  1. Gerhard Bry & Charlotte Boschan, 1971. "Cyclical Analysis of Time Series: Selected Procedures and Computer Programs," NBER Books, National Bureau of Economic Research, Inc, number bry_71-1, October.
  2. Stijn Claessens & M. Ayhan Kose & Marco E. Terrones, 2009. "What happens during recessions, crunches and busts?," Economic Policy, CEPR & CES & MSH, vol. 24, pages 653-700, October.
  3. Young Lee & Changyong Rhee & Taeyoon Sung, 2006. "Fiscal policy in Korea: Before and after the financial crisis," International Tax and Public Finance, Springer, vol. 13(4), pages 509-531, August.
  4. Watson, Mark W, 1994. "Business-Cycle Durations and Postwar Stabilization of the U.S. Economy," American Economic Review, American Economic Association, vol. 84(1), pages 24-46, March.
  5. Harding, Don & Pagan, Adrian, 2002. "Dissecting the cycle: a methodological investigation," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 365-381, March.
  6. Hong, Kiseok & Lee, Jong-Wha & Tang, Hsiao Chink, 2010. "Crises in Asia: Historical perspectives and implications," Journal of Asian Economics, Elsevier, vol. 21(3), pages 265-279, June.
  7. Hong, Kiseok & Tang, Hsiao Chink, 2010. "Crises in Asia: Recovery and Policy Responses," Working Papers on Regional Economic Integration 48, Asian Development Bank.
  8. Robert J. Barro & Charles J. Redlick, 2009. "Macroeconomic Effects from Government Purchases and Taxes," NBER Working Papers 15369, National Bureau of Economic Research, Inc.
  9. Gerhard Bry & Charlotte Boschan, 1971. "Foreword to "Cyclical Analysis of Time Series: Selected Procedures and Computer Programs"," NBER Chapters, in: Cyclical Analysis of Time Series: Selected Procedures and Computer Programs, pages -1 National Bureau of Economic Research, Inc.
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Cited by:
  1. Weonho Yang & Jan Fidrmuc & Sugata Ghosh, 2012. "Macroeconomic Effects of Government Spending Shocks: New Evidence Using Natural Distaster Relief in Korea," CEDI Discussion Paper Series 12-05, Centre for Economic Development and Institutions(CEDI), Brunel University.

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