The Korean Economic Review
How Effective are Automatic Stabilizers in Reducing Aggregate Volatility in Korea?
DongIk Kang (Korea Institute of Public Finance) and Jinhee Woo (Soongsil University)Year 2022Vol. 38No. 1
We quantified the contribution of automatic stabilizers on business cycle volatility using a heterogeneous agent New Keynesian model, which is calibrated to match important features of the Korean economy. We find that reducing unemployment benefit expenditures by 0.2% of the GDP increases its volatility by 0.24%. Reducing social transfers by the same amount increases the volatility by 1.49%. Lowering the tax rates of income tax, corporate tax, and VAT have little effect on aggregate volatility. A flat income tax increases the volatility of GDP by 3.49%. Simultaneously reducing unemployment benefit expenditures, social transfer expenditures, income tax revenue, corporate tax revenue, and VAT revenue each by 0.2% of the GDP increases the business cycle volatility by 1.56%. In the case of Korea, the stabilization effect of automatic stabilizers seems to be small.