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Public Debt and the Macroeconomic Stability of Japan

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  • Keigo Kameda

    (Associate Professor, Faculty of Economics, Niigata University.)

  • Masao Nakata

    (Senior Economist, Policy Research Institute, Ministry of Finance, Japan)

Abstract

Recently, the outstanding debt of the Japanese government amounts to 695 trillion yen, which implies 139.5% of GDP. In this paper, we constructed three IS-LM type dynamic models and estimate the eigenvalues of their differential systems. Then we confirm whether or not the huge amount of public debt violates the stability conditions for the Japanese economy. Our estimation concludes the Japanese economy to be unstable with the existence of a saddle-point equilibrium. Our simulation also shows that severe tax reform would be required to restore the economic stability. Concretely, the government has to raise the consumption tax rate to 15% from 5%, and in addition, allowing the income elasticities of income taxes and inhabitant taxes to increase by 0.033 each, which is equivalent to tax hikes of about 8.3 trillion yen. We assert that structural reform for the government budget including a tax system is essential and emergent.

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Bibliographic Info

Article provided by Policy Research Institute, Ministry of Finance Japan in its journal Public Policy Review.

Volume (Year): 1 (2005)
Issue (Month): 1 (March)
Pages: 49-90

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Handle: RePEc:mof:journl:ppr001d

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  1. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  2. 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.
  3. Turnovsky,Stephen J., 1977. "Macroeconomic Analysis and Stabilization Policy," Cambridge Books, Cambridge University Press, number 9780521291873.
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