The COVID-19 Pandemic, Fiscal Policies, and the Korean Economy: A CGE Model Analysis

Abstract

The COVID-19 pandemic led to severe economic disruptions worldwide, necessitating targeted fiscal interventions. This study assesses the impact of the pandemic and fiscal policies on the Korean economy using a multi-region, multi-sector computable general equilibrium (CGE) model and the Global Trade Analysis Project (GTAP) database (version 11A). The model, based on 2017 data projected to 2020, evaluates two policy scenarios: (1) the macroeconomic consequences of the pandemic and (2) the effectiveness of fiscal stimulus measures. The findings indicate that the pandemic resulted in a 1.47% contraction of Korea's GDP in 2020, deviating from its pre-pandemic annual growth of approximately 2%. Welfare losses reached US$57.38 billion, primarily driven by reduced consumer spending and rising unemployment. Supply chain disruptions and increased trade costs significantly impacted import and export volumes, contributing to a narrowed trade deficit of US$197.04 billion. Despite government stimulus measures, economic recovery remained constrained, with fiscal interventions leading to a net positive impact of US$104.68 billion relative to a no-policy scenario. These findings underscore the need for strategic fiscal policies to mitigate economic shocks, including targeted support for affected sectors, initiatives to stimulate private consumption, and measures to enhance Korea’s international trade competitiveness. The study provides insights into the role of fiscal policy in crisis management and contributes to the broader discourse on economic resilience in the post-pandemic era.