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Fiscal sustainability and regime shifts in Japan

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  • Ko, Jun-Hyung
  • Morita, Hiroshi

Abstract

This paper examines fiscal sustainability conditions in the Japanese economy estimating a Markov-switching vector autoregressive (VAR) model. Three fiscal sustainability conditions are identified in one VAR model: the stance of government, Domar (1944)-type GDP growth, and other factors. The main findings are summarized as follows. First, a regime switch occurred in the early 1990s. In the first regime, it appears that the government adopted the Ricardian stance to past debt levels, while such fiscal reactions are not observed in the second regime. Furthermore, only in the second regime, Domar (1944)-type income growth significantly decreases the debt–GDP ratio. Second, however, the contributions of these two shocks are minor in explaining historical variances of the debt–GDP ratio in both regimes. Third, forecast simulations reveal that the debt–GDP ratio is not sustainable in the second regime. Fourth, counterfactual simulations show that around 2 percent nominal growth or a Ricardian fiscal stance can keep the debt–GDP ratio sustainable.

Suggested Citation

  • Ko, Jun-Hyung & Morita, Hiroshi, 2015. "Fiscal sustainability and regime shifts in Japan," Economic Modelling, Elsevier, vol. 46(C), pages 364-375.
  • Handle: RePEc:eee:ecmode:v:46:y:2015:i:c:p:364-375
    DOI: 10.1016/j.econmod.2015.02.008
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    Cited by:

    1. Aldama, Pierre & Creel, Jérôme, 2019. "Fiscal policy in the US: Sustainable after all?," Economic Modelling, Elsevier, vol. 81(C), pages 471-479.
    2. repec:hal:spmain:info:hdl:2441/7suq9gqkp186e8d6eou29dipgk is not listed on IDEAS
    3. Yoshino, Naoyuki & Taghizadeh-Hesary, Farhad & Mizoguchi, Tetsuro, 2018. "Fiscal Policy Conditions for Government Budget Stability and Economic Recovery: Comparative Analysis of Japan and Greece," ADBI Working Papers 851, Asian Development Bank Institute.
    4. Takero Doi, 2018. "Is Abe's Fiscal Policy Ricardian? What Does the Fiscal Theory of Prices Mean for Japan?," Asian Economic Policy Review, Japan Center for Economic Research, vol. 13(1), pages 46-63, January.
    5. Akram, Vaseem & Rath, Badri Narayan, 2020. "What do we know about fiscal sustainability across Indian states?," Economic Modelling, Elsevier, vol. 87(C), pages 307-321.

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