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Fiscal policy switching in Japan, the US, and the UK

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  • Ito, Arata
  • Watanabe, Tsutomu
  • Yabu, Tomoyoshi

Abstract

This paper estimates fiscal policy feedback rules in Japan, the United States, and the United Kingdom for more than a century, allowing for stochastic regime changes. Estimating a Markov-switching model by the Bayesian method, we find the following: First, the Japanese data clearly reject the view that the fiscal policy regime is fixed, i.e., that the Japanese government adopted a Ricardian or a non-Ricardian regime throughout the entire period. Instead, our results indicate a stochastic switch of the debt-GDP ratio between stationary and nonstationary processes, and thus a stochastic switch between Ricardian and non-Ricardian regimes. Second, our simulation exercises using the estimated parameters and transition probabilities do not necessarily reject the possibility that the debt-GDP ratio may be nonstationary even in the long run (i.e., globally nonstationary). Third, the Japanese result is in sharp contrast with the results for the US and the UK which indicate that in these countries the government’s fiscal behavior is consistently characterized by Ricardian policy.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of the Japanese and International Economies.

Volume (Year): 25 (2011)
Issue (Month): 4 ()
Pages: 380-413

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Handle: RePEc:eee:jjieco:v:25:y:2011:i:4:p:380-413

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Web page: http://www.elsevier.com/locate/inca/622903

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Keywords: Fiscal policy rule; Fiscal discipline; Markov-switching regression;

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Cited by:
  1. Takero Doi & Takeo Hoshi & Tatsuyoshi Okimoto, 2011. "Japanese Government Debt and Sustainability of Fiscal Policy," NBER Working Papers 17305, National Bureau of Economic Research, Inc.
  2. David Greenlaw & James D. Hamilton & Peter Hooper & Frederic S. Mishkin, 2013. "Crunch Time: Fiscal Crises and the Role of Monetary Policy," NBER Working Papers 19297, National Bureau of Economic Research, Inc.
  3. Jun-Hyung Ko & Hiroshi Morita, 2013. "Regime Switches in Japanese Fiscal Policy: Markov-Switching VAR Approach," Global COE Hi-Stat Discussion Paper Series, Institute of Economic Research, Hitotsubashi University gd12-270, Institute of Economic Research, Hitotsubashi University.

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