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Fiscal Policy Switching: Evidence from Japan, the U.S., and the U.K

  • Arata Ito

    (Graduate Student, Graduate School of Economics, Hitotsubashi University (E-mail: ged1102@srv.cc.hit-u.ac.jp))

  • Tsutomu Watanabe

    (Institute of Economic Research and Research Center for Price Dynamics, Hitotsubashi University (E-mail: tsutomu.w@srv .cc.hit-u.ac.jp))

  • Tomoyoshi Yabu

    (Institute for Monetary and Economic Studies, Bank of Japan (E-mail: tomoyoshi.yabu@boj.or.jp))

This paper estimates fiscal policy feedback rules in Japan, the United States, and the United Kingdom for more than a century, allowing for stochastic regime changes. Estimating a Markov-switching model by the Bayesian method, we find the following: First, the Japanese data clearly reject the view that the fiscal policy regime is fixed, i.e., that the Japanese government adopted a Ricardian or a non-Ricardian regime throughout the entire period. Instead, our results indicate a stochastic switch of the debt-GDP ratio between stationary and nonstationary processes, and thus a stochastic switch between Ricardian and non-Ricardian regimes. Second, our simulation exercises using the estimated parameters and transition probabilities do not necessarily reject the possibility that the debt-GDP ratio may be nonstationary even in the long run (i.e., globally nonstationary). Third, the Japanese result is in sharp contrast with the results for the U.S. and the U.K. which indicate that in these countries the government's fiscal behavior is consistently characterized by Ricardian policy.

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File URL: http://www.imes.boj.or.jp/research/papers/english/07-E-02.pdf
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Paper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number 07-E-02.

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Date of creation: Feb 2007
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Handle: RePEc:ime:imedps:07-e-02
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