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Japanese government debt and sustainability of fiscal policy

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  • Doi, Takero
  • Hoshi, Takeo
  • Okimoto, Tatsuyoshi

Abstract

We construct quarterly series of the revenues, expenditures, and debt outstanding for Japan from 1980 to 2010, and analyze the sustainability of the fiscal policy. We pursue three approaches to examine the sustainability. First, we calculate the minimum tax rate that stabilizes the debt to GDP ratio given the future government expenditures. Using 2010 as the base year, we find that the government revenue to GDP ratio must rise permanently to 40–47% (from the current 33%) to stabilize the debt to GDP ratio. Second, we estimate the response of the primary surplus when the debt to GDP ratio increases. We allow the relationship to fluctuate between two “regimes” using a Markov switching model. In both regimes, the primary surplus to GDP ratio fails to respond positively to debt, which suggests the process is explosive. Finally, we estimate a fiscal policy function and a monetary policy function with Markov switching. We find that the fiscal policy is “active” (the tax revenues do not rise when the debt increases) and the monetary policy is “passive” (the interest rate does not react to the inflation rate sufficiently) in both regimes. These results suggest that the current fiscal situation for the Japanese government is not sustainable.

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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: 414-433

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Handle: RePEc:eee:jjieco:v:25:y:2011:i:4:p:414-433

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

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Keywords: Debt to GDP ratio; Minimum tax rate for fiscal sustainability; Markov switching model; Active policy; Passive policy;

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  1. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
  2. Barro, Robert J, 1986. " U.S. Deficits since World War I," Scandinavian Journal of Economics, Wiley Blackwell, vol. 88(1), pages 195-22.
  3. 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.
  4. Troy Davig, Eric Leeper, 2009. "Monetary-Fiscal Policy Interactions And Fiscal Stimulus," Caepr Working Papers 2009-010, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
  5. Chang-Jin Kim & Charles R. Nelson, 1999. "State-Space Models with Regime Switching: Classical and Gibbs-Sampling Approaches with Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262112388, December.
  6. Troy Davig & Eric M. Leeper, 2007. "Fluctuating Macro Policies and the Fiscal Theory," NBER Chapters, in: NBER Macroeconomics Annual 2006, Volume 21, pages 247-316 National Bureau of Economic Research, Inc.
  7. Smith, Aaron & Naik, Prasad A. & Tsai, Chih-Ling, 2006. "Markov-switching model selection using Kullback-Leibler divergence," Journal of Econometrics, Elsevier, vol. 134(2), pages 553-577, October.
  8. Henning Bohn, 1998. "The Behavior Of U.S. Public Debt And Deficits," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 949-963, August.
  9. Ito, Arata & Watanabe, Tsutomu & Yabu, Tomoyoshi, 2011. "Fiscal policy switching in Japan, the US, and the UK," Journal of the Japanese and International Economies, Elsevier, vol. 25(4), pages 380-413.
  10. Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
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Citations

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Cited by:
  1. Silvana Bartoletto & Bruno Chiarini & Elisabetta Marzano, 2013. "Is the Italian Public Debt Really Unsustainable? An Historical Comparison (1861-2010)," CESifo Working Paper Series 4185, CESifo Group Munich.
  2. Sakuragawa, Masaya & Hosono, Kaoru, 2011. "Fiscal sustainability in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 25(4), pages 434-446.
  3. Sagiri Kitao & Selahattin Imrohoroglu & Tomoaki Yamada, 2013. "Achieving Fiscal Balance in Japan," Economics Working Paper Archive at Hunter College 441, Hunter College Department of Economics.
  4. Selahattin Imrohoroglu & Gary Hansen, 2013. "Fiscal Reform and Government Debt in Japan: A Neoclassical Perspective," 2013 Meeting Papers 697, Society for Economic Dynamics.
  5. Kosuke Aoki & Nao Sudo, 2013. "Bank’s regulation, asset portfolio choice of banks, and macroeconomic dynamics," CARF F-Series CARF-F-323, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
  6. Takeo Hoshi & Takatoshi Ito, 2012. "Defying Gravity: How Long Will Japanese Government Bond Prices Remain High?," NBER Working Papers 18287, National Bureau of Economic Research, Inc.
  7. Fujii, Takao & Hiraga, Kazuki & Kozuka, Masafumi, 2013. "Effects of public investment on sectoral private investment: A factor augmented VAR approach," Journal of the Japanese and International Economies, Elsevier, vol. 27(C), pages 35-47.
  8. 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.
  9. 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.
  10. Afonso, António & Toffano, Priscilla, 2013. "Fiscal regimes in the EU," Working Paper Series 1529, European Central Bank.
  11. Alan J. Auerbach & Yuriy Gorodnichenko, 2014. "Fiscal Multipliers in Japan," NBER Working Papers 19911, National Bureau of Economic Research, Inc.
  12. Tomomi Miyazaki, 2014. "Fiscal Reform and Fiscal Sustainability: Evidence from Australia and Sweden," Discussion Papers 1407, Graduate School of Economics, Kobe University.

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