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The optimum quantity of debt for Japan

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  • Nakajima, Tomoyuki
  • Takahashi, Shuhei

Abstract

Japan’s net government debt is 130% of GDP in 2013. The present paper analyzes the effect of the large government debt on welfare. We use a heterogeneous agent, incomplete markets model with idiosyncratic wage risk, a borrowing constraint, and endogenous labor supply. We calibrate the model to the Japanese economy using evidence based on macro-level and micro-level data. We find that the optimal level of government debt is –50% of GDP for Japan. The welfare cost of keeping government debt to 130% of GDP rather than the optimal level is 0.19% of consumption.

Suggested Citation

  • Nakajima, Tomoyuki & Takahashi, Shuhei, 2017. "The optimum quantity of debt for Japan," Journal of the Japanese and International Economies, Elsevier, vol. 46(C), pages 17-26.
  • Handle: RePEc:eee:jjieco:v:46:y:2017:i:c:p:17-26
    DOI: 10.1016/j.jjie.2017.08.002
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    More about this item

    Keywords

    Government debt; Welfare; Incomplete markets; Inequality; Uncertainty; Japanese economy;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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