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Optimal fiscal policy rule for achieving fiscal sustainability: the Japanese case

Author

Listed:
  • Naoyuki Yoshino
  • Tetsuro Mizoguchi
  • Farhad Taghizadeh-Hesary

Abstract

Japan's debt-to-GDP ratio is the highest among OECD countries. While the Domar condition and Bohn's conditions are often used in the literature to check whether a government's debt situation is in a dangerous zone, this paper shows that the Domar condition is obtained only from the supply of government bonds without consideration of the demand side. In addition, Bohn's condition satisfies the stability of the government budget in the long run and even if the condition is satisfied, the recovery of the economy may not be achieved. This paper proposes a new condition considering both the demand and supply of the bond market that satisfies both the stability of the government budget and the recovery of the economy. The empirical findings show that to achieve fiscal sustainability, both sides of the Japanese Government budget (expenditure and revenue) need to be adjusted simultaneously and the decrease in government expenditure has to be more than the increase in tax revenue.

Suggested Citation

  • Naoyuki Yoshino & Tetsuro Mizoguchi & Farhad Taghizadeh-Hesary, 2019. "Optimal fiscal policy rule for achieving fiscal sustainability: the Japanese case," Global Business and Economics Review, Inderscience Enterprises Ltd, vol. 21(2), pages 156-173.
    • Handle: RePEc:ids:gbusec:v:21:y:2019:i:2:p:156-173
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    Citations

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    Cited by:

    1. Naoyuki Yoshino & Hiroaki Miyamoto, 2021. "Reconsideration of the “Domar condition” to check sustainability of budget deficit," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 17(3), pages 1-12, November.
    2. Michael Takudzwa Pasara & Rufaro Garidzirai, 2020. "Causality Effects among Gross Capital Formation, Unemployment and Economic Growth in South Africa," Economies, MDPI, vol. 8(2), pages 1-12, April.

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