Effect of Monetary Policy on Government Spending Multiplier

Joonyoung Hur () and Jong-Suk Han ()
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Joonyoung Hur: Department of Economics, Sogang University, Seoul
Jong-Suk Han: Department of Tax Policy Research, Korea Institute of Public Finance,

No 2004, Working Papers from Nam Duck-Woo Economic Research Institute, Sogang University (Former Research Institute for Market Economy)

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.

Keywords: Government spending multiplier; Monetary policy; Time-varying coefficient VAR (search for similar items in EconPapers)
JEL-codes: C11 E32 E52 E62 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2020
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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