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Long-run mild deflation under fiscal unsustainability in Japan

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  • Saito, Makoto
  • 齊藤, 誠

Abstract

A macroeconomic policy debate has been ongoing in Japan for over the past two decades, with one side proposing drastic fiscal reforms to avoid hyperinflation and the other recommending expansionary policies to escape from a liquidity trap. However, neither side has been able to explain why mild deflation has continued for such a long time, despite primary budget deficits and unprecedented monetary expansion. This paper presents an alternative theory, arguing that fiscal sustainability will be restored in the future not as a result of drastic fiscal reforms, hyperinflation, or continuous mild inflation, but largely through a one-off surge in the price level, such that the price level becomes several times higher than before. Such a price surge is considered a rare event accompanied by catastrophic endowment shocks in the following years. Within this framework, mild deflation coexists with fiscal unsustainability until this sharp surge in the price level occurs.

Suggested Citation

  • Saito, Makoto & 齊藤, 誠, 2020. "Long-run mild deflation under fiscal unsustainability in Japan," Discussion Paper Series 703, Institute of Economic Research, Hitotsubashi University.
    • Handle: RePEc:hit:hituec:703
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    File URL: https://hermes-ir.lib.hit-u.ac.jp/hermes/ir/re/30965/DP703.pdf
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    Cited by:

    1. Kiyotaka Nakashima & Masahiko Shibamoto & Koji Takahashi, 2019. "Identifying Quantitative and Qualitative Monetary Policy Shocks," Discussion Paper Series DP2019-09, Research Institute for Economics & Business Administration, Kobe University, revised Mar 2023.

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    More about this item

    Keywords

    the fiscal theory of the price level; fiscal sustainability; mild deflation; price surges; yield curves;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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