Analysing the effects of fiscal policy and assessing its sustainability

This thesis presents three empirical analyses of the macroeconomic effects and sustainability of fiscal policy. Three key issues are examined: the transmission mechanism for fiscal policy shocks in Korea, the sustainability of government debt in three selected countries (Korea, the UK, and the US), and the effects of fiscal consolidation on macroeconomic activity. The main findings are as follows. First, government spending has a positive effect on the economy. Capital spending is likely to boost the economy more effectively than current spending. Second, there is a cointegrating relationship between the variables in Korea and the US, but not in the UK. That means fiscal policy in Korea and the US is sustainable, while fiscal policy in the UK is not. Third, fiscal consolidation is not likely to be expansionary in terms of GDP growth. The results also show that fiscal consolidation in time of high debt-to-GDP ratios, the spending-base, or high sovereign risk has fewer negative effects on economic growth than fiscal consolidation in time of low debt-to-GDP ratios, the tax-base, or low sovereign risk. The economic growth rate, government spending-based fiscal consolidation, low long-term interest rates, and higher sovereign risk have significant effects on reducing debt-to-GDP ratio