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A Numerical Evaluation on a Sustainable Size of Primary Deficit in Japan

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  • Real Arai

    (Graduate School of Social Sciences, Hiroshima University)

  • Junji Ueda

    (Policy Research Institute, the Ministry of Finance, Japan)

Abstract

We investigate how large a size of primary deficit to GDP ratio the Japan's government can sustain. For this investigation, we construct an overlapping generations model, in which multi-generational households live and the government maintains a constant ratio of primary deficit to GDP. We numerically show that the primary deficit cannot be sustained unless the rate of economic growth is unrealistically high, which is more than five percent according to our settings. Our result implies that Japan's government needs to achieve a positive primary balance in the long-run in order to avoid the divergence of the public debt to GDP ratio.

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File URL: http://www.mof.go.jp/pri/research/discussion_paper/ron235.pdf
File Function: First version, 2012
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Bibliographic Info

Paper provided by Policy Research Institute, Ministry of Finance Japan in its series Discussion papers with number ron235.

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Length: 30 pages
Date of creation: Jun 2012
Date of revision:
Handle: RePEc:mof:wpaper:ron235

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Web page: http://www.mof.go.jp/pri/
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Keywords: fiscal sustainability; public debt; primary deficit; economic growth;

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References

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  1. Kaiji Chen & Ayşe İmrohoroğlu & Selahattin İmrohoroğlu, 2007. "The Japanese saving rate between 1960 and 2000: productivity, policy changes, and demographics," Economic Theory, Springer, vol. 32(1), pages 87-104, July.
  2. Michael Brauninger, 2005. "The Budget Deficit, Public Debt, and Endogenous Growth," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 7(5), pages 827-840, December.
  3. Fumio Hayashi & Edward C. Prescott, 2000. "The 1990s in Japan: a lost decade," Working Papers 607, Federal Reserve Bank of Minneapolis.
  4. Daisuke Ishikawa & Junji Ueda & Real Arai, 2012. "Future Changes of the Industrial Structure due to Aging and Soaring Demands for Healthcare Services in Japan - an Analysis Using a Multi-Sector OLG Model in an Open Economy -," Discussion papers ron243, Policy Research Institute, Ministry of Finance Japan.
  5. Serkan Arslanalp & Takahiro Tsuda, 2012. "Tracking Global Demand for Advanced Economy Sovereign Debt," IMF Working Papers 12/284, International Monetary Fund.
  6. Arai, Real, 2008. "Productive government expenditure and fiscal sustainability," MPRA Paper 8553, University Library of Munich, Germany.
  7. Nigel Andrew Chalk & Richard Hemming, 2000. "Assessing Fiscal Sustainability in Theory and Practice," IMF Working Papers 00/81, International Monetary Fund.
  8. Takeo Hoshi & Takatoshi Ito, 2012. "Defying Gravity: How Long Will Japanese Government Bond Prices Remain High?," NBER Working Papers 18287, National Bureau of Economic Research, Inc.
  9. Yakita, Akira, 2008. "Sustainability of public debt, public capital formation, and endogenous growth in an overlapping generations setting," Journal of Public Economics, Elsevier, vol. 92(3-4), pages 897-914, April.
  10. Fumio Hayashi & Edward C. Prescott, 2002. "Data Appendix to The 1990s in Japan: A Lost Decade," Technical Appendices hayashi02, Review of Economic Dynamics.
  11. Toshihiro Ihori & Ryuta Ray Kato & Masumi Kawade & Shun-ichiro Bessho, 2006. "Public Debt and Economic Growth in an Aging Japan," Working Papers EMS_2006_11, Research Institute, International University of Japan.
  12. Shigeyuki Hamori, 1996. "Consumption growth and the intertemporal elasticity of substitution: some evidence from income quintile groups in Japan," Applied Economics Letters, Taylor & Francis Journals, vol. 3(8), pages 529-532.
  13. Chalk, Nigel A., 2000. "The sustainability of bond-financed deficits: An overlapping generations approach," Journal of Monetary Economics, Elsevier, vol. 45(2), pages 293-328, April.
  14. James D. Hamilton & Marjorie A. Flavin, 1985. "On the Limitations of Government Borrowing: A Framework for Empirical Testing," NBER Working Papers 1632, National Bureau of Economic Research, Inc.
  15. 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.
  16. Masaya Sakuragawa & Kaoru Hosono, 2010. "Fiscal Sustainability Of Japan: A Dynamic Stochastic General Equilibrium Approach," The Japanese Economic Review, Japanese Economic Association, vol. 61(4), pages 517-537, December.
  17. "Imrohoroglu, Selahattin" & "Sudo, Nao", 2011. "Will a Growth Miracle Reduce Debt in Japan?," Economic Review, Hitotsubashi University, vol. 62(1), pages 44-56, January.
  18. Masasaki Fuse, 2004. "Estimating intertemporal substitution in Japan," Applied Economics Letters, Taylor & Francis Journals, vol. 11(4), pages 267-269.
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Cited by:
  1. Muto, Ichiro & Oda, Takemasa & Sudo, Nao, 2012. "Macroeconomic Impact of Population Aging in Japan: A Perspective from an Overlapping Generations Model," MPRA Paper 42550, University Library of Munich, Germany.

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