Public Capital and Government Deficits in an Aging Japan: Simulation Analysis(in Japanese)

This paper analyzes effects of accumulation of public capital on welfare in the transition to an aging Japan by applying a simulated general equilibrium growth model. We develop an 80 period OLG model, where the latest data of Japan has been used in order to make our results as realistic as possible in the simulation analyses. We explicitly incorporate public capital, which consists of two different kinds: one directly affecting utility such as public parks, and the other stimulating private production such as public roads. We consider the former type of public capital by introducing it as a component in utility, and the latter type by adding it to the private production function. Our simulation results indicate: Firstly, as the level of outstanding government bonds decreases, GDP, thus welfare decreases in the short run. However, in the long run, GDP and welfare increase by the decrease in outstanding government bonds. Secondly, as long as public capital has a certain positive effect on utility, the accumulation of public capital financed by tax is preferable to future generations provided that the level of public debts is kept constant. Finally, an increase in public capital which stimulates private production results in an increase in GDP, but the effect of the increase in this kind of public capital on social welfare entirely depends on the evaluation of the other type of public capital.