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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Paper provided by East Asian Bureau of Economic Research in its series Macroeconomics Working Papers with number
481.
Length: 42 pages Date of creation: Jan 2005 Date of revision: Handle: RePEc:eab:macroe:481
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Find related papers by JEL classification: C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
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