Fiscal spending may have a greater impact on the economy than generally viewed, but the effect may take some time to take place, a central bank report said Monday.
In a recent study conducted by the Bank of Korea, the multiplier effect of government spending on the local economy came to 1.27 over a five-year period.
This means every 1 trillion won ($850 million) spent by the government will generate 1.27 trillion won in gross domestic product over a five-year period, the report said.
Previously, the multiplier effect of government spending had been deemed to be considerably smaller.
The BOK said this was because previous studies did not take into account certain aspects of government spending, such as its effect on the decision of households and companies to spend more or less.
"An increase in government spending leads to a rise in GDP. The government's fiscal policy can be used to stabilize the economy," Park Gwang-yong, a researcher at the BOK's Economic Research Institute, told reporters.
Meanwhile, most other research institutes here believe the multiplier effect of government spending to be around 0.5, meaning 1 trillion won spent by the government will add only 500 billion won to the GDP.
This, they say, is because an additional bond issuance by the government to increase its spending will lead to a drop in market liquidity, which in turn may discourage local consumers and companies to reduce their own spending. (Yonhap)