Economic Policy Uncertainty and Its Implications on Economic Recovery: A Case Study of Korea

Abstract

Why does economic growth remain so sluggish across so many countries after the onset of the financial crisis? What causes economic recovery to lag behind in countries including Korea? There could be many factors such as debt overhang and slow growth of total factor productivity that serve as an explanation, but several economists focus on the role of ‘economic policy uncertainty’. Economic policy uncertainty is a concept of economic risks where the 'future path' of government policy such as fiscal, regulatory, and monetary policy is uncertain. For example, if next year's tax rate is unclear - which means it can move in either direction - the ensuing conflict between economic growth and fiscal sustainability heightens economic policy uncertainty. Why is economic policy uncertainty so important? The future path of government policy is an important factor for privates to determine how much they consume, save, and invest today. People tend to postpone their decisions to until after policy uncertainty is resolved. For example, potential entrant firms try to delay their entrant decisions until uncertainty on tax policy is settled, because they care about after-tax profits. This could reduce overall private investment and hamper economic recovery.