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Fiscal Sustainability Of Japan: A Dynamic Stochastic General Equilibrium Approach

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  • MASAYA SAKURAGAWA
  • KAORU HOSONO

Abstract

The purpose of this paper is to investigate the fiscal sustainability of Japan by applying a dynamic stochastic general equilibrium model to the Japanese economy. By introducing intermediation costs into the model, we succeed in explaining the observed relationship between the interest and GDP growth rates, which is crucial in testing for sustainability. When the projected real growth rate is 2.5%, the average real interest rate becomes 2.57%, and the debt-to‐GDP ratio gradually increases stochastically so that government debt is not sustainable. To recover sustainability, the primary surplus must be 0.2% of GDP.

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File URL: http://hdl.handle.net/10.1111/j.1468-5876.2009.00503.x
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Bibliographic Info

Article provided by Japanese Economic Association in its journal Japanese Economic Review.

Volume (Year): 61 (2010)
Issue (Month): 4 (December)
Pages: 517-537

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Handle: RePEc:bla:jecrev:v:61:y:2010:i:4:p:517-537

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Keywords: H68 ; G12 ; E62 ;

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Cited by:
  1. Gary Hansen & Selo Imrohoroglu, 2013. "Fiscal Reform and Government Debt in Japan: A Neoclassical Perspective," NBER Working Papers 19431, National Bureau of Economic Research, Inc.
  2. Tomomi Miyazaki, 2014. "Fiscal Reform and Fiscal Sustainability: Evidence from Australia and Sweden," Discussion Papers 1407, Graduate School of Economics, Kobe University.
  3. Arai, Real & Ueda, Junji, 2013. "A numerical evaluation of the sustainable size of the primary deficit in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 30(C), pages 59-75.
  4. Real Arai & Junji Ueda, 2012. "A Numerical Evaluation on a Sustainable Size of Primary Deficit in Japan," Discussion papers ron235, Policy Research Institute, Ministry of Finance Japan.
  5. Tomoaki Yamada & Sagiri Kitao & Selahattin Imrohoroglu, 2013. "Achieving Fiscal Balance in Japan," 2013 Meeting Papers 736, Society for Economic Dynamics.
  6. Sakuragawa, Masaya & Hosono, Kaoru, 2011. "Fiscal sustainability in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 25(4), pages 434-446.
  7. Naoyuki Yoshino & Tetsuro Mizoguchi, 2013. "Change in the Flow of Funds and the Fiscal Rules Needed for Fiscal Stabilization," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 9(1), pages 51-70, January.

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