Effects of Fiscal Policy Uncertainty and Asymmetric Spillovers: Evidence From Korea

What the paper says

ABSTRACT Uncertainty surrounding tax, expenditure and debt policy exerts an impact on the real economy. Motivated by this, our study investigates the effects of fiscal policy uncertainty (FPU) on macroeconomic and fiscal aggregates in Korea. Using a recently developed Korea FPU index, we show that while shocks to FPU lead to an increase in government spending, they significantly decline real output, employment, interest rate, tax revenue, and effective corporate tax rate. This implies that the government may increase its spending to counteract the negative effect of FPU shocks on the real economy. Our findings suggest that diminishing FPU levels is important for the stabilisation of the Korean economy. Furthermore, employing FPU indices from major countries, including the US, Japan, and China, we explore international FPU spillovers. Our results provide evidence that the US is the primary transmitter of uncertainty shocks to Korea, followed by China and Japan. Our analysis also reveals the asymmetric nature of FPU spillovers across economies, implying that economic circumstances can result in substantial uncertainty spillovers to Korea from major economies through FPU.