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Regime Switches in Japanese Fiscal Policy: Markov-Switching VAR Approach

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  • Jun-Hyung Ko
  • Hiroshi Morita
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    Abstract

    This paper empirically investigates the changing dynamics of fiscal policy shocks to the macroeconomy in Japan. By estimating a Markov-switching vector-autoregressive (VAR) model, regime switches in both automatic fiscal responses to output and discretionary fiscal shocks are investigated. The main findings are summarized as follows. First, the best-fit model is a version with four regimes that allows time variation in both coefficients and disturbance variances. Second, the structural changes occurred in the mid-1970s, the early 1990s, and the late 1990s. Third, in contrast to the other regimes, expansionary fiscal shocks depress output and consumption in the third regime. Fourth, fiscal shocks crowd out investment only in the fourth regime. Fifth, the twin-deficit hypothesis holds in all regimes.

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    Bibliographic Info

    Paper provided by Institute of Economic Research, Hitotsubashi University in its series Global COE Hi-Stat Discussion Paper Series with number gd12-270.

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    Date of creation: Jan 2013
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    Handle: RePEc:hst:ghsdps:gd12-270

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    Keywords: ï¬scal policy; twin-deï¬cit hypothesis; Markov-switching; VAR;

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    1. Christopher A. Sims & Tao Zha, 2006. "Were There Regime Switches in U.S. Monetary Policy?," American Economic Review, American Economic Association, vol. 96(1), pages 54-81, March.
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    4. Jouchi Nakajima & Munehisa Kasuya & Toshiaki Watanabe, 2009. "Bayesian Analysis of Time-Varying Parameter Vector Autoregressive Model for the Japanese Economy and Monetary Policy," IMES Discussion Paper Series 09-E-13, Institute for Monetary and Economic Studies, Bank of Japan.
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    12. 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..
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    14. Inoue, Tomoo & Okimoto, Tatsuyoshi, 2008. "Were there structural breaks in the effects of Japanese monetary policy? Re-evaluating policy effects of the lost decade," Journal of the Japanese and International Economies, Elsevier, vol. 22(3), pages 320-342, September.
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    16. Roel Beetsma & Massimo Giuliodori & Franc Klaassen, 2008. "The Effects of Public Spending Shocks on Trade Balances and Budget Deficits in the European Union," Journal of the European Economic Association, MIT Press, vol. 6(2-3), pages 414-423, 04-05.
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