The Effects of Fiscal Policy in Korea

Abstract

This paper investigates whether a neoclassical model can explain output and investment in Korea. The model disaggregates government purchases into defense purchases, nondefense consumption purchases and government investment and splits each of these into a permanent component and a transitory component. Although the regressions reported in this paper do fit well, their implications have no consistent neoclassical interpretation and have unreasonable policy implications. If one ignores how unreasonable these implications are, one can conclude that government purchases affect the Korean economy in much different ways according to what type they are and whether they are permanent or tranistory. [320]