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On the Empirical (Ir)Relevance of the Zero Lower Bound Constraint: The Case of Fiscal Multiplier in Japan

Author

Listed:
  • Hirokuni Iiboshi
  • Yasuharu Iwata
  • Takayuki Tsuruga

Abstract

Japan's prolonged ZLB period alongside substantial debt accumulation makes it a compelling laboratory for testing whether fiscal multipliers differ across normal and ZLB periods. This paper investigates this question using a sign- and zero-restricted TVP-VAR that jointly identifies fiscal rules and structural shocks. We find: (1) government spending and distortionary tax multipliers remain similar across regimes, contradicting standard New Keynesian predictions; (2) fiscal adjustment matters more than the debt-to-GDP ratio in shaping multiplier size; and (3) inflation responses are dampened at the ZLB across various macroeconomic shocks. Our results suggest that the ZLB is irrelevant for output but consequential for inflation.

Suggested Citation

  • Hirokuni Iiboshi & Yasuharu Iwata & Takayuki Tsuruga, 2026. "On the Empirical (Ir)Relevance of the Zero Lower Bound Constraint: The Case of Fiscal Multiplier in Japan," ISER Discussion Paper 1306, Institute of Social and Economic Research, The University of Osaka.
    • Handle: RePEc:dpr:wpaper:1306
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