Which Stimulates More? Spending and Transfers in Korea’s Wage-Rigid Economy
This paper examines how fiscal policy transmits through government spending and direct transfers in South Korea using a Heterogeneous Agent New Keynesian (HANK) model with wage rigidity and debt-sensitive taxation. Calibrated to Korean macroeconomic data, the model captures key institutional features, including household heterogeneity, liquidity constraints, and labor market stickiness. A 1% increase in government spending generates a peak output gain of 0.5% that persists over 60 quarters, while an equivalent transfer shock yields a sharper 0.2% consumption increase that fades within 10 quarters. Tax feedback plays a critical role—spending raises labor income tax rates by up to 0.6 percentage points, compared to only 0.3 points under transfers—affecting household behavior and fiscal sustainability. Sensitivity analysis shows that fiscal multipliers decline sharply with higher steady-state bond supply, stronger tax adjustment rules, and more aggressive monetary tightening. For instance, increasing the bond supply target from 30% to 100% of GDP reduces the impact multiplier by over 46%, while a shift to aggressive monetary policy lowers it by more than 50%. These findings highlight the trade-offs between short-run stabilization and long-run fiscal discipline, offering new insights into optimal policy coordination in an unequal, wage-rigid economy.
HANK model · Fiscal policy · Government transfers · Government spending · Wage rigidity
JEL CODESE62 · E52 · H30
