Research results have shown that government expenditure stimulates local economies more strongly than investment expenditure in the short term. This implies that in fiscal policy aimed at short-term economic stimulation, the role of expenditure is more important than that of infrastructure investment. However, it has been found that local government expenditure leaves negative spillover effects in other regions.
It was also analyzed that if the trust in government fiscal policy varies by country, the effects of the same fiscal expansion on economic growth and consumption may manifest differently. The higher the trust, the clearer the effect on increasing economic growth rates.
On the 22nd, at the World Economists Conference (ESWC) held at COEX in Gangnam, Seoul, economists participating in the session on "Fiscal Multiplier" presented the latest research results analyzing the effects of such fiscal policy.
◇ Government consumption multiplier about 2.5… Investment multiplier is negative
Professor Ko Kyung-Woong from Johns Hopkins University introduced empirical analysis results using data at the state level in the U.S., emphasizing that government expenditure focused on consumption has a greater effect on short-term local economic activation.
Government consumption expenditure refers to the purchase of everyday consumer goods such as food, clothing, energy, and services, while government investment means long-term capital investment in infrastructure construction or vehicles and equipment.
Professor Ko said, "The state government consumption expenditure multiplier was greater than the investment expenditure multiplier," and added, "Based on two years after the government expenditure was implemented, the consumption expenditure multiplier was estimated to be about 2.5, while the investment expenditure multiplier was -0.21."
While investment expenditure did not show statistically significant effects, it means that government consumption leads to an increase in local income of more than $2.5 for every $1 spent. Professor Ko stated, "Government consumption expenditure has a significant effect on directly increasing local income through job expansion and labor income increase."
However, the effects of such consumption expenditure were analyzed to not remain confined to specific regions but to leave negative spillover effects on other regions. According to Professor Ko's explanation, the shock from government consumption expenditure raises income and prices in the relevant region, thereby leading to the Central Bank tightening its monetary policy, which results in decreased income in other regions.
In contrast, investment shocks have relatively weaker negative effects on other regions and sometimes demonstrate positive effects.
◇ Fiscal policy effects improve with higher market trust
In the same session, Professor Shengliang O from Shanghai Jiao Tong University pointed out that the effects of fiscal policy can greatly differ according to varying levels of trust by country. Professor O analyzed economic forecast data from 41 countries' specialized agencies together with Christopher Evans, an economist at the International Monetary Fund (IMF), to study the impact of government expenditure shocks on gross domestic product (GDP) growth and consumption outlook.
They divided countries into 'well-performing countries' and 'unstable countries' based on their fiscal conditions and market trust during the experiment. As a result, in countries with high fiscal trust, when governments expand expenditure, consumption significantly increases, and the effective exchange rate drops, resulting in an increase in economic growth rates.
Conversely, in countries where trust in fiscal policy is low or sustainability questions are raised, the effects of fiscal expansion were rather negative. The consumption increase effect was minimal, and the effective exchange rate appreciated, leading to a decrease in economic growth rates.
Professor O analyzed that these differences stem from information asymmetry between the government and the public, as well as the process of expectation formation. He stated, "Theoretically, if the economy is perceived to be poor, prices may fall and consumption may decrease during fiscal expansion," adding, "When the economy is perceived to be good, prices may rise and consumption may shrink."
He further explained, "In well-performing countries, expectations for consumption and growth rise following fiscal expansion, while in unstable countries, pessimistic expectations that the economy will deteriorate enhance, leading to a decline in consumption outlook." This illustrates that even the same fiscal policy can lead to entirely different outcomes based on trust.
Professor O stated, "The effects of fiscal expansion can vary significantly depending on the fiscal conditions of countries, information transparency, and market trust," noting, "Simply increasing government expenditure does not guarantee economic stimulation effects, and managing information and expectations is crucial."