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

Author

Listed:
  • 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))

Abstract

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.

Suggested Citation

  • Arata Ito & Tsutomu Watanabe & Tomoyoshi Yabu, 2007. "Fiscal Policy Switching: Evidence from Japan, the U.S., and the U.K," IMES Discussion Paper Series 07-E-02, Institute for Monetary and Economic Studies, Bank of Japan.
  • Handle: RePEc:ime:imedps:07-e-02
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    Cited by:

    1. Masaya Sakuragawa & Kaoru Hosono, 2010. "Fiscal Sustainability Of Japan: A Dynamic Stochastic General Equilibrium Approach," The Japanese Economic Review, Japanese Economic Association, vol. 61(4), pages 517-537, December.
    2. Tokuo Iwaisako & Keiko Okada, 2010. "Understanding the Decline in Japan's Saving Rate in the New Millennium," Macroeconomics Working Papers 23113, East Asian Bureau of Economic Research.
    3. Afonso, António & Toffano, Priscilla, 2013. "Fiscal regimes in the EU," Working Paper Series 1529, European Central Bank.

    More about this item

    Keywords

    Fiscal Policy Rule; Fiscal Discipline; Markov-Switching Regression;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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