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Fiscal Policy Issues in Korea after the Current Crisis

  • Kiseok Hong

    (Asian Development Bank Institute)

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    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 Koreas 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 Koreas fiscal stimulus in 2009, while having contributed greatly to the economys fast recovery, was unusually large compared with typical fiscal responses during economic downturns. This paper also investigates whether the rapid increase in Koreas fiscal debt burden is admissible in terms of long-term sustainability. Although existing evidence suggests that Koreas 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.eaber.org/node/22754
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    Paper provided by East Asian Bureau of Economic Research in its series Macroeconomics Working Papers with number 22754.

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    Date of creation: Jan 2010
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    Handle: RePEc:eab:macroe:22754
    Contact details of provider: Postal: JG Crawford Building #13, Asia Pacific School of Economics and Government, Australian National University, ACT 0200
    Web page: http://www.eaber.org

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    1. 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.
    2. 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, June.
    3. 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.
    4. Hong, Kiseok & Tang, Hsiao Chink, 2010. "Crises in Asia: Recovery and Policy Responses," Working Papers on Regional Economic Integration 48, Asian Development Bank.
    5. Robert J. Barro & Charles J. Redlick, 2011. "Macroeconomic Effects From Government Purchases and Taxes," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 51-102.
    6. Hong, Kiseok & Lee, Jong-Wha & Tang, Hsiao Chink, 2009. "Crises in Asia: Historical Perspectives and Implications," ADB Economics Working Paper Series 152, Asian Development Bank.
    7. 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.
    8. 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.
    9. Harding, Don & Pagan, Adrian, 2002. "Dissecting the cycle: a methodological investigation," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 365-381, March.
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