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Dynamic Analysis of Budget Policy Rules in Japan

Author

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  • Koichi Futagami

    (Graduate School of Economics, Osaka University)

  • Kunihiko Konishi

    (Institute of Economic Research, Kyoto University)

Abstract

We construct an endogenous growth model with public capital and endogenous labor supply and examine quantitatively the welfare effects of fiscal consolidation on the Japanese economy. We consider two modes of fiscal consolidation: the adjustment to a new lower target of the debt-to-GDP and deficit-to-GDP ratios. We find that the debt and deficit reduction rules based only on government consumption and investment expenditure cuts improve households' welfare. This improvement in households' welfare becomes large as the speed of fiscal consolidation rises. Further, reductions in the target debt-to-GDP or deficit-to-GDP ratio generate larger welfare gains. We also discuss the welfare effects of fiscal consolidation with tax increases and transfer payment decreases.

Suggested Citation

  • Koichi Futagami & Kunihiko Konishi, 2018. "Dynamic Analysis of Budget Policy Rules in Japan," Bank of Japan Working Paper Series 18-E-3, Bank of Japan.
    • Handle: RePEc:boj:bojwps:wp18e03
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    Cited by:

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    2. Sohei Kaihatsu & Maiko Koga & Tomoya Sakata & Naoko Hara, 2019. "Interaction between Business Cycles and Economic Growth," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 37, pages 99-126, November.
    3. Yoshida, Motonori, 2023. "Chronological changes of government sectors’ fiscal policies and fiscal sustainability in Japan," Japan and the World Economy, Elsevier, vol. 66(C).
    4. Fukuda, Shin-ichi, 2023. "Evaluation of fiscal policy using alternative GDP data in Japan," Japan and the World Economy, Elsevier, vol. 67(C).
    5. Alberola, Enrique & Cheng, Gong & Consiglio, Andrea & Zenios, Stavros A., 2023. "Unconventional monetary policy and debt sustainability in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 69(C).
    6. Maebayashi, Noritaka, 2021. "The pace of fiscal consolidations, fiscal sustainability, and welfare: An overlapping generations approach," MPRA Paper 112593, University Library of Munich, Germany, revised 30 Feb 2022.

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    More about this item

    Keywords

    Fiscal consolidation; Endogenous growth; Welfare;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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