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Regime Switches in Japanese Fiscal Policy: Markov-Switching VAR Approach

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  • Jun-Hyung Ko
  • Hiroshi Morita

Abstract

This paper empirically investigates the changing dynamics of fiscal policy shocks to the macroeconomy in Japan. By estimating a Markov-switching vector-autoregressive (VAR) model, regime switches in both automatic fiscal responses to output and discretionary fiscal shocks are investigated. The main findings are summarized as follows. First, the best-fit model is a version with four regimes that allows time variation in both coefficients and disturbance variances. Second, the structural changes occurred in the mid-1970s, the early 1990s, and the late 1990s. Third, in contrast to the other regimes, expansionary fiscal shocks depress output and consumption in the third regime. Fourth, fiscal shocks crowd out investment only in the fourth regime. Fifth, the twin-deficit hypothesis holds in all regimes.

Suggested Citation

  • Jun-Hyung Ko & Hiroshi Morita, 2013. "Regime Switches in Japanese Fiscal Policy: Markov-Switching VAR Approach," Global COE Hi-Stat Discussion Paper Series gd12-270, Institute of Economic Research, Hitotsubashi University.
  • Handle: RePEc:hst:ghsdps:gd12-270
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    File URL: http://gcoe.ier.hit-u.ac.jp/research/discussion/2008/pdf/gd12-270.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    ï¬ scal policy; twin-deï¬ cit hypothesis; Markov-switching; VAR;

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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