The Role of Public Works in the Political Business Cycle and the Instability of the Budget Deficits in Japan
This paper discusses the Liberal Democratic Party's (LDP) ability to maintain a majority of seats in the Diet after WWII by focusing on the role of public investment. The paper discusses three periods, namely, (i) the high-growth period (1950 to 1985), (ii) the asset bubble period (1986 to 1990), and (iii) the period of economic downturn after the bubble (post 1990). During the high-growth period, government investment had a strong positive output effect and it increased the tax revenue in the medium and long run. The high rate of private capital formation boosted growth and tax revenue even further. During the asset bubble period of the late 1980s, Japanese tax revenue increased due to high asset and property prices, and growth stayed high because of strong aggregate demand. The Japanese economy experienced slower growth after the asset bubble burst. The LDP continued its high-spending policy by issuing Japanese government bonds (JGB) to finance the deficits but has not been able to revive growth to previous levels. Accumulated government debt now amounts to 180 percent of GDP and it will be difficult to issue any more JGB. Fiscal policy in post-bubble Japan no longer fulfilled the stability conditions that were identified by Blinder and Solow (1974). (c) 2010 The Earth Institute at Columbia University and the Massachusetts Institute of Technology.
Volume (Year): 9 (2010)
Issue (Month): 1 (January)
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