The effects of government spending shocks on the trade account balance in Korea

This paper investigates fiscal policy effects on the trade account balance in Korea using open economy vector autoregressive (VAR) models. In response to fiscal spending shocks, real appreciations occur, followed by deteriorations in the trade account balance with the pre-2000 sample period, while r...

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Bibliographic Details
Published inInternational review of economics & finance Vol. 53; pp. 57 - 70
Main Authors Kim, Hyeongwoo, Lee, Daeyup
Format Journal Article
LanguageEnglish
Published Elsevier Inc 01.01.2018
Subjects
Fiscal policy
Real exchange rate
Trade account
Twin deficit
Twin divergence
VAR
E62
Fiscal policy
F41
Real exchange rate
F32
E32
VAR
Twin divergence
Trade account
Twin deficit
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Summary:This paper investigates fiscal policy effects on the trade account balance in Korea using open economy vector autoregressive (VAR) models. In response to fiscal spending shocks, real appreciations occur, followed by deteriorations in the trade account balance with the pre-2000 sample period, while real depreciations occur leading to an improvement in the trade account balance with the post-2000 sample period. We explain this structural break in relation to Korea's transition from a tightly managed exchange rate regime to a more market-oriented floating system after Korea's foreign exchange crisis in 1997–98. Furthermore, such fiscal policy effects from our post-2000 sub-sample imply that expansionary fiscal policy can be effective in stimulating private sector economy in Korea.
ISSN:1059-0560
1873-8036
DOI:10.1016/j.iref.2017.10.001