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A numerical evaluation of the sustainable size of the primary deficit in Japan

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  • Arai, Real
  • Ueda, Junji

Abstract

We investigate how large a primary deficit-to-GDP ratio Japan’s government can sustain. For this investigation, we construct an overlapping generations model in which multi-generational households live and the government maintains a constant ratio of the primary deficit to GDP. We numerically show that the primary deficit cannot be sustained unless the rate of economic growth is unrealistically high, which is more than five percent according to our settings. Our result implies that Japan’s government needs to achieve a positive primary balance in the long run in order to avoid the divergence of the public debt-to-GDP ratio.

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Bibliographic Info

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

Volume (Year): 30 (2013)
Issue (Month): C ()
Pages: 59-75

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Handle: RePEc:eee:jjieco:v:30:y:2013:i:c:p:59-75

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

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Keywords: Fiscal sustainability; Public debt; Primary deficit; Economic growth;

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References

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  1. Toshihiro Ihori & Ryuta Ray Kato & Masumi Kawade & Shun-ichiro Bessho, 2006. "Public Debt and Economic Growth in an Aging Japan," Working Papers EMS_2006_11, Research Institute, International University of Japan.
  2. Selahattin Imrohoroglu & Nao Sudo, 2011. "Will a Growth Miracle Reduce Debt in Japan?," IMES Discussion Paper Series 11-E-01, Institute for Monetary and Economic Studies, Bank of Japan.
  3. Daisuke Ishikawa & Junji Ueda & Real Arai, 2012. "Future Changes of the Industrial Structure due to Aging and Soaring Demands for Healthcare Services in Japan - an Analysis Using a Multi-Sector OLG Model in an Open Economy -," Discussion papers ron243, Policy Research Institute, Ministry of Finance Japan.
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  6. Yakita, Akira, 2008. "Sustainability of public debt, public capital formation, and endogenous growth in an overlapping generations setting," Journal of Public Economics, Elsevier, vol. 92(3-4), pages 897-914, April.
  7. Michael Brauninger, 2005. "The Budget Deficit, Public Debt, and Endogenous Growth," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 7(5), pages 827-840, December.
  8. R. Anton Braun & Daisuke Ikeda & Douglas H. Joines, 2009. "The Saving Rate In Japan: Why It Has Fallen And Why It Will Remain Low," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(1), pages 291-321, 02.
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  10. Chalk, Nigel A., 2000. "The sustainability of bond-financed deficits: An overlapping generations approach," Journal of Monetary Economics, Elsevier, vol. 45(2), pages 293-328, April.
  11. Serkan Arslanalp & Takahiro Tsuda, 2012. "Tracking Global Demand for Advanced Economy Sovereign Debt," IMF Working Papers 12/284, International Monetary Fund.
  12. Fumio Hayashi & Edward C. Prescott, 2002. "Data Appendix to The 1990s in Japan: A Lost Decade," Technical Appendices hayashi02, Review of Economic Dynamics.
  13. Shigeyuki Hamori, 1996. "Consumption growth and the intertemporal elasticity of substitution: some evidence from income quintile groups in Japan," Applied Economics Letters, Taylor & Francis Journals, vol. 3(8), pages 529-532.
  14. Arai, Real, 2008. "Productive government expenditure and fiscal sustainability," MPRA Paper 8553, University Library of Munich, Germany.
  15. James D. Hamilton & Marjorie A. Flavin, 1985. "On the Limitations of Government Borrowing: A Framework for Empirical Testing," NBER Working Papers 1632, National Bureau of Economic Research, Inc.
  16. 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.
  17. Masaya Sakuragawa & Kaoru Hosono, 2010. "Fiscal Sustainability Of Japan: A Dynamic Stochastic General Equilibrium Approach," The Japanese Economic Review, Japanese Economic Association, vol. 61(4), pages 517-537, December.
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Cited by:
  1. Muto, Ichiro & Oda, Takemasa & Sudo, Nao, 2012. "Macroeconomic Impact of Population Aging in Japan: A Perspective from an Overlapping Generations Model," MPRA Paper 42550, University Library of Munich, Germany.

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