External Information and Fiscal Multipliers

Abstract

To accurately quantify the effects of government spending, it is necessary to identify exogenous changes in government spending. In this paper, we estimate a proxy VAR, developed by Stock and Watson (2012) and Mertens and Ravn (2013), using a revised supplementary budget from the government as the instrumental variable to derive fiscal multipliers in Korea. By using this methodology, we identify government spending shocks that have purged effects, such as automated stabilizers, without assuming the timing restriction that is widely employed to estimate multipliers. The empirical analysis shows that an exogenous increases in government consumption and investment, and government transfers, all increase GDP and private demand statistically significantly. To be precise, the one-year cumulative multipliers are 1.02 and 0.54 for government consumption plus investment and transfers.

Keywords: Fiscal Multiplier, Fiscal Policy, External Instrument, proxy VAR

JEL Classification: C54, D80, E62, H30, H50