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Macroeconomic Volatility Under High Accumulation of Government Debt: Lessons from Japan

In: Japan’s Lost Decade

Author

Listed:
  • Paul D. McNelis

    (Fordham University)

  • Naoyuki Yoshino

    (Asian Development Bank Institute (ADBI)
    Keio University)

Abstract

This chapter applies Bayesian estimation to an open-economy dynamic stochastic general equilibrium (DSGE) model of Japan to assess the effects of expanding government debt on interest rates, real exchange-rate dynamics, and real sector performance. We find that the emergence of even a small risk premium on will trigger considerable instability in the real and nominal variables. We show that a switch to an exchange-rate rule for monetary policy would considerably moderate the instability induced by a rising risk premium.

Suggested Citation

  • Paul D. McNelis & Naoyuki Yoshino, 2017. "Macroeconomic Volatility Under High Accumulation of Government Debt: Lessons from Japan," ADB Institute Series on Development Economics, in: Naoyuki Yoshino & Farhad Taghizadeh-Hesary (ed.), Japan’s Lost Decade, chapter 0, pages 77-108, Springer.
    • Handle: RePEc:spr:adbchp:978-981-10-5021-3_4
    DOI: 10.1007/978-981-10-5021-3_4
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    References listed on IDEAS

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    1. N/A, 1999. "The world economy," National Institute Economic Review, National Institute of Economic and Social Research, vol. 168(1), pages 3-3, April.
    2. N/A, 1999. "The world economy," National Institute Economic Review, National Institute of Economic and Social Research, vol. 167(1), pages 3-3, January.
    3. N/A, 1999. "The world economy," National Institute Economic Review, National Institute of Economic and Social Research, vol. 170(1), pages 3-3, October.
    4. N/A, 1999. "The world economy," National Institute Economic Review, National Institute of Economic and Social Research, vol. 169(1), pages 3-3, July.
    5. Naoyuki Yoshino & Tetsuro Mizoguchi, 2010. "The Role of Public Works in the Political Business Cycle and the Instability of the Budget Deficits in Japan," Asian Economic Papers, MIT Press, vol. 9(1), pages 94-112, Winter/Sp.
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    Cited by:

    1. Naoyuki Yoshino & Tetsuro Mizoguchi, 2013. "Change in the Flow of Funds and the Fiscal Rules Needed for Fiscal Stabilization," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 9(1), pages 51-70, January.
    2. Yoshino, Naoyuki & Taghizadeh-Hesary, Farhad & Mizoguchi, Tetsuro, 2018. "Fiscal Policy Conditions for Government Budget Stability and Economic Recovery: Comparative Analysis of Japan and Greece," ADBI Working Papers 851, Asian Development Bank Institute.
    3. Iwata, Yasuharu, 2013. "Two fiscal policy puzzles revisited: New evidence and an explanation," Journal of International Money and Finance, Elsevier, vol. 33(C), pages 188-207.
    4. Naoyuki Yoshino & Tetsuro Mizoguchi & Farhad Taghizadeh-Hesary, 2017. "Optimal Fiscal Policy Rule for Achieving Fiscal Sustainability: A Japanese Case Study," ADB Institute Series on Development Economics, in: Naoyuki Yoshino & Farhad Taghizadeh-Hesary (ed.), Japan’s Lost Decade, chapter 0, pages 59-75, Springer.

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