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Secular Stagnation and Low Interest Rates under the Fear of a Government Debt Crisis

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  • Keiichiro KOBAYASHI
  • Kozo Ueda

Abstract

In this study, we explain the driving forces behind the secular stagnation associated with a persistent decrease in interest rates by employing a model that incorporates a crisis risk triggered by government debt accumulation. The model shows that fear of large-scale capital taxation and capital misallocation in future debt crises accounts for almost half the economic slowdown in Japan over the past two decades. Over the same period, the government bond yield declines, because a decrease in the expected returns on capital makes investing in government bonds more attractive than investing in capital.

Suggested Citation

  • Keiichiro KOBAYASHI & Kozo Ueda, 2020. "Secular Stagnation and Low Interest Rates under the Fear of a Government Debt Crisis," CIGS Working Paper Series 20-008E, The Canon Institute for Global Studies.
  • Handle: RePEc:cnn:wpaper:20-008e
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    Cited by:

    1. KOBAYASHI Keiichiro, 2022. "Recursive Expectations Approach in Policymaking," Policy Discussion Papers 22028, Research Institute of Economy, Trade and Industry (RIETI).
    2. Kazuma Inagakli, & Yoshiyasu Ono & Takayuki Tsuruga, 2022. "Accounting for the slowdown in output growth after the Great Recession: A wealth preference approach," ISER Discussion Paper 1174r, Institute of Social and Economic Research, Osaka University, revised Mar 2023.
    3. Pierre L Siklos, 2022. "Monetary, fiscal and demographic interactions in Japan: impact and a comparative assessment," Working Papers halshs-03776217, HAL.
    4. Acocella, Nicola, 2021. "Stagnation," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 74(2), pages 121-140.
    5. Tomomi Miyazaki, 2023. "Comment on “Recursive expectations approach in policymaking” by Professor Keiichiro Kobayashi," International Journal of Economic Policy Studies, Springer, vol. 17(2), pages 399-402, August.
    6. Keiichiro Kobayashi, 2023. "Recursive expectations approach in policymaking," International Journal of Economic Policy Studies, Springer, vol. 17(2), pages 385-397, August.

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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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