Dynamic Effects of Fiscal Policy in Japan: Evidence from a Structural VAR with Sign Restrictions
In this paper, we employ structural vector autoregression (VAR) with sign restrictions to identify the dynamic effects of fiscal policy shocks in Japan. We find that (i) an increase in government spending has positive effects on consumption and wages in the short run, but these effects are not persistent, and the effects on GDP are almost zero. We also find, surprisingly, that (ii) an increase in government revenue has significant positive effects on GDP, consumption, and investment in the medium and long run although it has negative effects in the short run. Finally, (iii) the balanced-budget spending policy scenario is better than deficit-spending and deficit-financed tax-cut policy scenarios.
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