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Issue Report

Collection of full-length papers and in-depth analysis of economic and management issues.

Proposals for Successful Fiscal Policy
During a Recession

Proposals for Successful Fiscal Policy During a Recession

KANG Sung-Won

May 8, 2009

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During a Recession PDF email Print

Originally released on April 1, 2009

The Korean economy plunged into a sharp recession from the fourth quarter of 2008. The global recession has been a strong blow to exports, and private consumption and investment have been unable to absorb the external shock. As illustrated in Figure 1, exports in the last quarter of 2008 were down by 3.0% of GDP from a year ago while private consumption and investment were down by 4.9% of GDP. It is unlikely that the private sector will be able to recover on its own, considering the historic scale of the recent global recession.

Traditionally, governments rely on expansionary monetary and fiscal policy to fight recessions. However, when a recession is triggered by a financial crisis, the effectiveness of monetary expansion is severely weakened due to the ensuing “credit crunch,” where financial institutions become extremely reluctant to lend owing to fears of default. Accordingly, the only recourse the government is left with is expansionary fiscal policy. This is why governments around the world are rushing into fiscal expansion.

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