Crowding out and Efficacy of Fiscal Policy in Korea

Abstract

A modest attempt has been made to analyze the efficacy of fiscal policy in Korea by investigating the degree of crowding out or crowding in within the context of a household optimization model and through the estimation of household consumption and saving functions with the data set over the period 1963-86. Fiscal policy in Korea has been a powerfully effective instrument for economic stabilization, to the extent that government spending in Korea, whether debt-or tax-financed, has crowded in rather than crowded out household consumption. This result contrasts with the notion of fiscal policy-ineffectiveness posited by the ultrarationality and perfect foreknowledge hypotheses. Furthermore, government and corporate saving turn out to be complements to rather than substitutes for household saving, which indicates that government and corporate saving can be effective policy variables for national capital formation.