THE MACROECONOMIC EFFECTS OF GOVERNMENT DEBT IN KOREA

The effects of government debt on output, the price level, the interest rate, and the real exchange rate in Korea is examined. The framework of analysis is a nine variable vector autoregressive model. The effects of debt are evaluated by computing variance decompositions, impulse response functions, and cumulative impulse response functions. The variance decompositions indicate significant effects on output, the price level, the interest rate, and the exchange rate. The impulse response functions indicate significant, negative short-run effects of a shock to debt on these variables, but no long-run effects. The cumulative impulse response functions yield similar results. These results are at odds with conventional models in which government debt is wealth, but appear consistent with some models in which debt is not wealth.