Japanese government debt and sustainability of fiscal policy
We construct quarterly series of the revenues, expenditures, and debt outstanding for Japan from 1980 to 2010, and analyze the sustainability of the fiscal policy. We pursue three approaches to examine the sustainability. First, we calculate the minimum tax rate that stabilizes the debt to GDP ratio given the future government expenditures. Using 2010 as the base year, we find that the government revenue to GDP ratio must rise permanently to 40–47% (from the current 33%) to stabilize the debt to GDP ratio. Second, we estimate the response of the primary surplus when the debt to GDP ratio increases. We allow the relationship to fluctuate between two “regimes” using a Markov switching model. In both regimes, the primary surplus to GDP ratio fails to respond positively to debt, which suggests the process is explosive. Finally, we estimate a fiscal policy function and a monetary policy function with Markov switching. We find that the fiscal policy is “active” (the tax revenues do not rise when the debt increases) and the monetary policy is “passive” (the interest rate does not react to the inflation rate sufficiently) in both regimes. These results suggest that the current fiscal situation for the Japanese government is not sustainable.
Volume (Year): 25 (2011)
Issue (Month): 4 ()
|Contact details of provider:|| Web page: http://www.elsevier.com/locate/inca/622903|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Smith, Aaron D. & Naik, Prasad A. & Tsai, Chih-Ling, 2005.
"Markov-Switching Model Selection Using Kullback-Leibler Divergence,"
11976, University of California, Davis, Department of Agricultural and Resource Economics.
- Smith, Aaron & Naik, Prasad A. & Tsai, Chih-Ling, 2006. "Markov-switching model selection using Kullback-Leibler divergence," Journal of Econometrics, Elsevier, vol. 134(2), pages 553-577, October.
- Ito, Arata & Watanabe, Tsutomu & Yabu, Tomoyoshi, 2011. "Fiscal policy switching in Japan, the US, and the UK," Journal of the Japanese and International Economies, Elsevier, vol. 25(4), pages 380-413.
- Barro, Robert J, 1986. " U.S. Deficits since World War I," Scandinavian Journal of Economics, Wiley Blackwell, vol. 88(1), pages 195-22.
- Troy Davig & Eric M. Leeper, 2005.
"Fluctuating Macro Policies and the Fiscal Theory,"
NBER Working Papers
11212, National Bureau of Economic Research, Inc.
- Robert J. Hodrick & Edward Prescott, 1981.
"Post-War U.S. Business Cycles: An Empirical Investigation,"
451, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
- Takero Doi & Takeo Hoshi & Tatsuyoshi Okimoto, 2011.
"Japanese Government Debt and Sustainability of Fiscal Policy,"
NBER Working Papers
17305, National Bureau of Economic Research, Inc.
- Doi, Takero & Hoshi, Takeo & Okimoto, Tatsuyoshi, 2011. "Japanese government debt and sustainability of fiscal policy," Journal of the Japanese and International Economies, Elsevier, vol. 25(4), pages 414-433.
- 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.
- Troy Davig & Eric Leeper, 2009.
"Monetary-Fiscal Policy Interactions And Fiscal Stimulus,"
Caepr Working Papers
2009-010, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
- Davig, Troy & Leeper, Eric M., 2011. "Monetary-fiscal policy interactions and fiscal stimulus," European Economic Review, Elsevier, vol. 55(2), pages 211-227, February.
- Troy Davig & Eric M. Leeper, 2009. "Monetary-fiscal policy interactions and fiscal stimulus," Research Working Paper RWP 09-12, Federal Reserve Bank of Kansas City.
- Troy Davig & Eric M. Leeper, 2009. "Monetary-Fiscal Policy Interactions and Fiscal Stimulus," NBER Working Papers 15133, National Bureau of Economic Research, Inc.
- Davig, Troy & Leeper, Eric M., 2009. "Monetary-Fiscal Policy Interactions and Fiscal Stimulus," CEPR Discussion Papers 7509, C.E.P.R. Discussion Papers.
- Chang-Jin Kim & Charles R. Nelson, 1999. "State-Space Models with Regime Switching: Classical and Gibbs-Sampling Approaches with Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262112388, June.
- Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
When requesting a correction, please mention this item's handle: RePEc:eee:jjieco:v:25:y:2011:i:4:p:414-433. See general information about how to correct material in RePEc.
If references are entirely missing, you can add them using this form.