Analyzing the Relationship between Fiscal Policy, Household Debt, and Housing Prices in Korea

This study analyzes the state-dependent characteristics of fiscal policy in Korea using a two-agent New Keynesian dynamic stochastic general equilibrium model. According to the findings, there is a crowding-out effect of increases in government spending, which reduces private consumption and investment, thereby decreasing GDP. However, this effect is smaller when household borrowing constraints are binding compared to the opposite case. When household borrowing constraints are slack, households save the temporarily increased income from increases in government spending in anticipation of future tax hikes. Conversely, when borrowing constraints are binding, borrowing households spend the temporarily increased income on final goods and housing services consumption. This increases total consumption and boosts GDP. Currently, Korea exhibits a household leverage ratio lower than the long-term trend, suggesting that the proportion of borrowing households facing binding constraints is below the long-run trend. This indicates that the crowding-out effect of increases in government spending on GDP is significant.