Proceedings of the 6th Economic & Finance Conference, OECD Headquarters, Paris

EFFECTS OF GOVERNMENT CONSUMPTION SHOCKS IN CHINA, JAPAN, AND KOREA

MINJU JEONG

Abstract:

This paper investigates the effects of government consumption shocks on various key macro variables for China, Korea and Japan, by using a structural VAR model. The main empirical findings are as follows. First, government spending multipliers of all three countries are far larger than 1 in recent years. The government spending multiplier is larger in China than in Korea and Japan. The effectiveness of fiscal expansion has not been changed in China, but substantially changed in Korea (after Asian financial crisis) and Japan. Second, the effects on exchange rate and trade balance are different across countries. Interestingly, real exchange rate depreciates and trade balance improve more under more flexible exchange rate regime. Some empirical findings are consistent with the standard theory but others are not.

Keywords: Structural VAR, government consumption shocks, Fiscal Multiplier, Real Exchange Rate, Current Account, China, Japan, Korea

DOI: 10.20472/EFC.2016.006.012

PDF: Download