 Macroeconomic Policy Mix and Social Welfare (in Korean)Hyun-Jeong Kim () and
Seong Hun Yun ()
Economic Analysis (Quarterly), 2007, vol. 13, issue 2, 1-43 Abstract: The paper examines, theoretically and empirically, the social welfare implications of the interaction (or game) between monetary and fiscal authorities in a small open economy and an inflation targeting regime. Theoretically, it considers four types of policy game (Nash, Monetary Leadership, Fiscal Leadership, and Cooperation) and shows that, when there is a cost-push shock, it is possibile for fiscal and monetary policies to contradict each other under Nash and two leadership games, magnifying the volatility of macroeconomic variables and thereby having a negative effect on social welfare. Comparing expected social welfare losses, it shows that when two authorities optimize a common objective function (Cooperation) social welfare loss can be minimized due to harmonized policies even under a cost-push shock. Nash and fiscal leadership games have a similar magnitude of social welfare loss, which is bigger than that under policy cooperation, but much smaller than that under a monetary leadership game. This implies that it is socially more desirable that the fiscal authority decides its own policy in consideration of the reaction of the monetary authority while the latter's decision making is rule-based (fiscal leadership)rather than the other way round (monetary leadership). According to the result of impulse response analysis using Korean macro data after the currency crisis, fiscal and monetary policy have complementary relations when a demand shock occurs whereas they have contradictory relationships at the early stage when supply and exchange rate shocks take place, requiring a longer period for equilibrium recovery. Consequently, it seems that the macroeconomic policy mix in Korea does not appear to have the property of cooperation. These results mean that the fiscal and monetary authorities should cooperate more closely with each other to enhance social welfare and that fiscal policy should respond more positively tothe business cycle than in the past. Keywords: Optimal Policy Mix; Social Welfare; Policy Game; Dynamic Stochastic General Equilibrium Model; Nash Game; Leadership Game; Policy Cooperation (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bok:journl:v:13:y:2007:i:2:p:1-43 Access Statistics for this article Economic Analysis (Quarterly) is currently edited by Wook Sohn, Hwan-koo Kang and Jaerang Lee More articles in Economic Analysis (Quarterly) from Economic Research Institute, Bank of Korea Contact information at EDIRC. |
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