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BOK Working Paper No.2021-9, Estimating Fiscal Multiplier: Do Financing Methods Matter?

연구조정실 (02-759-5349) 2021.06.30 391

Title : Estimating Fiscal Multiplier: Do Financing Methods Matter?
Author : Soyoung Kim(Seoul National University), Yonggun Kim(BOK)


This paper analyzes whether there is a difference in the effectiveness of the fiscal policy used as the method of financing is changed. Existing literature often fails to strictly meet theoretical conditions when defining financing methods and lacks systematic analysis. Therefore, we present theoretically rigorous counterfactual analysis methodologies and definitions of financing methods. We show that the fiscal multiplier is likely to be overestimated when analyzed using existing research methods. We find evidence that the debt-financed government spending multiplier is estimated to be up to 0.31 larger than when tax-financed government spending multipliers are used, up until five years after a government spending shock. However, five years after the shock, the debt-financed government spending multiplier is similar to or smaller than the tax-financed government spending multiplier. However, the difference between the two multipliers is not statistically supported. These results are generally supported by various changes in the pattern of government spending and the time difference between any tax increase and government expenditure. On the other hand, an analysis of the impact of a change in financing methods on other economic variables other than GDP confirms that a change in funding methods results in a different response to consumption, investment, net exports, and real wages.

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