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The stabilizing effect of fiscal policies on the dynamics of effective demand and income distribution in Japan

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  • Ryunosuke Sonoda

    (Saga University)

Abstract

In this study, we build a Kaleckian model incorporating fiscal policies and investigate the possibility that fiscal policies have had a stabilizing influence on the dynamics of effective demand and income distribution in Japan. In a Kaleckian model with a fluctuating income distribution rate, the combination of the demand and distributive regimes may destabilize the system, and it is important to clarify the policy approach to stabilize it. For this purpose, we specify dynamic system consisting of three variables, the rate of capacity utilization, wage share, and the level of government expenditure. Then we estimate the parameters in this model using data relating to the Japanese economy from 1977 to 2007. As a result, we obtained the following findings: first, even if the combination of demand and distributive regimes has the potential to destabilize the system, the system may stabilize if counter-cyclical fiscal policy has a sufficient effect on the effective demand and if the government does not take an excessive budgetary austerity stance. Second, in Japan, the dynamics of effective demand and income distribution may have been unstable, and fiscal policy has not contributed to systemic stability. Third, the main reason Japan's fiscal policy did not have a stabilizing effect was not the stance of the government's fiscal policy, but rather the insufficient effect of the policy on effective demand. These results suggest the existence of different factors that stabilized the Japanese economy.

Suggested Citation

  • Ryunosuke Sonoda, 2021. "The stabilizing effect of fiscal policies on the dynamics of effective demand and income distribution in Japan," Evolutionary and Institutional Economics Review, Springer, vol. 18(2), pages 385-405, September.
    • Handle: RePEc:spr:eaiere:v:18:y:2021:i:2:d:10.1007_s40844-021-00218-0
    DOI: 10.1007/s40844-021-00218-0
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    References listed on IDEAS

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    1. Mark Setterfield (ed.), 2010. "Handbook of Alternative Theories of Economic Growth," Books, Edward Elgar Publishing, number 12814.
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    More about this item

    Keywords

    Demand regime; Distributive regime; Price Phillips curve; Nominal wage Phillips curve; Fiscal policy;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • J53 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Labor-Management Relations; Industrial Jurisprudence

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