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Sustainability of Public Debt: Evidence from Pre-World War II Japan

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  • Masato Shizume

    (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)

Abstract

Japan defaulted on its public debts only once throughout its modern history, after World War II (WWII). How did Japan lose its ability to sustain its public debts? This paper explores the sustainability of public debts in Japan before and during WWII. First, this paper reviews the brief history of pre-WWII public finance in Japan with reference to some narrative evidence, data, and previous works. Second, this paper conducts three stages of econometric analyses. It tests Ricardian neutrality of public debt. It tests the dynamic efficiency of Japanese economy, and it conducts Bohn's tests for the relationship between public debt and primary fiscal balance. The tests indicate that Japanese public debts were sustainable until 1931, and unsustainable in and after 1932. Third, this paper interprets the results of quantitative analyses with narrative modes of analysis. During the 1930s, Japan lost its fiscal discipline because of the military's effective veto over budgetary processes and because of the absence of pressure for sound fiscal policy from international financial markets.Length: 35 pages

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File URL: http://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/dp201.pdf
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Bibliographic Info

Paper provided by Research Institute for Economics & Business Administration, Kobe University in its series Discussion Paper Series with number 201.

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Date of creation: Mar 2007
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Handle: RePEc:kob:dpaper:201

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  1. Hugh Rockoff & Michael D. Bordo, 1996. "The Gold Standard as a "Good Housekeeping Seal of Approval"," Departmental Working Papers 199528, Rutgers University, Department of Economics.
  2. Peter Temin, 1991. "Lessons from the Great Depression," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262700441, December.
  3. 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..
  4. Barro, Robert J, 1986. " U.S. Deficits since World War I," Scandinavian Journal of Economics, Wiley Blackwell, vol. 88(1), pages 195-22.
  5. Subrata Ghatak & José R. Sánchez-Fung, 2006. "Is Fiscal Policy Sustainable in Developing Economies?," Discussion Papers 384, Government Institute for Economic Research Finland (VATT).
  6. Henning Bohn, 2005. "The Sustainability of Fiscal Policy in the United States," CESifo Working Paper Series 1446, CESifo Group Munich.
  7. Henning Bohn, 1998. "The Behavior Of U.S. Public Debt And Deficits," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 949-963, August.
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