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Spain, Japan, and the Dangers of Early Fiscal Tightening

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  • Javier Díaz Giménez
  • R. AntonBraun

Abstract

Spain's current recession was preceded by an extended period of rapid growth in real estate and equity prices. The recent sudden and sharp decline in these asset prices has been followed by a deep economic contraction. Is this recession a large but transient phenomenon? Or is it perhaps instead the harbinger of a protracted period of depressed asset prices and economic stagnation? Japan experienced a similar pattern of growth in land and equity prices in the late 1980s. The collapse of the Japanese bubble economy was followed by a protracted period of declines in asset prices and depressed economic activity. We compare Japan's experience in the 1980s and 1990s with current developments in Spain. One message that emerges from this narrative is that a fiscal tightening in Japan in 1997 may have been premature. We develop a prototypical New Keynesian model, calibrate it to replicate the Japan's experience in the 1980s and 1990s, and use it to evaluate the risks of tightening fiscal policy too early when the nominal interest rate is low. We find that a premature fiscal tightening can have large and negative effects on the real economy.

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Bibliographic Info

Paper provided by FEDEA in its series Working Papers with number 2010-14.

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Date of creation: Mar 2010
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Handle: RePEc:fda:fdaddt:2010-14

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  1. R. Anton Braun & Yuichiro Waki, 2005. "Monetary Policy during Japan's Lost Decade," CARF F-Series CARF-F-035, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
  2. Barro, Robert J., 1981. "Output Effects of Government Purchases," Scholarly Articles 3451294, Harvard University Department of Economics.
  3. Rotemberg, Julio J., 1996. "Prices, output, and hours: An empirical analysis based on a sticky price model," Journal of Monetary Economics, Elsevier, vol. 37(3), pages 505-533, June.
  4. Robert E. Hall, 1977. "Investment, Interest Rates, and the Effects of Stabilization Policies," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 8(1), pages 61-122.
  5. R. Anton Braun & Daisuke Ikeda & Douglas H. Joines, 2007. "The Saving Rate in Japan: Why It Has Fallen and Why It Will Remain Low," CIRJE F-Series CIRJE-F-535, CIRJE, Faculty of Economics, University of Tokyo.
  6. Selahattin Imrohoroglu & Ayse Imrohoroglu & Kaiji Chen, 2006. "The Japanese Saving Rate," American Economic Review, American Economic Association, vol. 96(5), pages 1850-1858, December.
  7. Lawrence J. Christiano & Martin Eichenbaum & Sergio Rebelo, 2010. "When is the government spending multiplier large?," CQER Working Paper 2010-01, Federal Reserve Bank of Atlanta.
  8. Kaiji Chen & Ayse Imrohoroglu & Selo Imrohoroglu, 2005. "Japanese Saving Rate," Macroeconomics 0502017, EconWPA.
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Cited by:
  1. Mark Weisbrot & Juan Antonio Montecino, 2010. "Alternatives to Fiscal Austerity in Spain," CEPR Reports and Issue Briefs 2010-18, Center for Economic and Policy Research (CEPR).

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