Macroeconomic effects of government transfer payments: Evidence from Korea

Although government transfer payments (TPs) have recently become an important policy option to prevent severe recessions, the literature on the aggregate effects of TPs is sparse. To fill this gap, this study empirically examines the effects of government TPs on the aggregate economy. To this end, I estimate two leading time series models using Korean data: a local projection with an instrumental variable model and a proxy vector autoregressive model. Employing natural disasters as an instrumental variable to identify government TP shocks, the results reveal that an exogenous increase in TPs has large stimulus effects, including raising gross domestic product, private consumption, and investment. In particular, an increase in TPs boosts non-durable goods consumption, services consumption, and residential investment. Finally, the estimated peak output multipliers of TPs are greater than one, which implies that TPs can be an effective tool for overcoming recessions.