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Effect of Monetary Policy on Government Spending Multiplier

Author

Listed:
  • Joonyoung Hur

    (Department of Economics, Sogang University, Seoul)

  • Jong-Suk Han

    (Department of Tax Policy Research, Korea Institute of Public Finance,)

Abstract

This paper empirically examines the effect of the monetary policy stance toward inflation 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 that the medium-run government spending multiplier is dampened as the anti-inflationary stance of the central bank becomes more aggressive. The TVC-VAR estimate shows that Korea’s monetary policy became more hawkish until 2009 and attenuated afterward, which is consistent with the narrative evidence from the Bank of Korea. Meanwhile, the medium-run government spending multiplier declined until 2009, after which it started to increase. Our empirical result supports existing theoretical work such as Christiano et al. (2011) that posits a negative relationship between the degree of the monetary authority’s anti-inflationary stance and the size of government spending multipliers.

Suggested Citation

  • Joonyoung Hur & Jong-Suk Han, 2020. "Effect of Monetary Policy on Government Spending Multiplier," Working Papers 2004, Nam Duck-Woo Economic Research Institute, Sogang University (Former Research Institute for Market Economy).
  • Handle: RePEc:sgo:wpaper:2004
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    References listed on IDEAS

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    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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