Effect of Monetary Policy on Government Spending Multiplier

Han Jong-Suk () and Hur Joonyoung ()
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Han Jong-Suk: Department of Economics, Ajou Unversity, 206, Worldcup-ro, Yeongtong-gu, Suwon-si, Gyeonggi-do 16499, Republic of Korea
Hur Joonyoung: School of Economics, Sogang University, 35, Baekbeom-ro, Mapo-gu, Seoul 04107, Republic of Korea

The B.E. Journal of Macroeconomics, 2023, vol. 23, issue 1, 57-93

Abstract: This paper empirically examines the effect of monetary policy 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 a substantial degree of time variation in the medium-run government spending multipliers, which increase over time and become statistically different from zero throughout the 2010s. Yet the reverse pattern is observed in the policy rate responses to government spending shocks, decreasing gradually until 2008–09 and then stagnating for the subsequent period. Decompositions of the policy rate responses reveal that inflation is an important ingredient in determining the responses of the nominal interest rate to government spending shocks, and thus has a critical impact on the size of government spending multipliers. In particular, our finding underscores a substantial role of the monetary policy stance against inflation in shaping 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)
Date: 2023
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DOI: 10.1515/bejm-2020-0229

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