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Fiscal Inflation in Japan: The Role of Unfunded Fiscal Shocks

Author

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  • Takeki Sunakawa

    (Professor, Faculty of Economics, Hitotsubashi University (E-mail: takeki.sunakawa@gmail.com))

Abstract

We investigate the extent to which fiscal factors have contributed to inflation in Japan over the past four decades. Despite sustained fiscal expansion and rising debt since the 1990s, inflation remained low until recent years. Using the medium-scale DSGE model developed by Bianchi et al. (2023), we estimate the model with Japanese data and find that, in contrast to the U.S. case, unfunded fiscal shocks are not the main drivers of inflation in Japan. Instead, real demand and supply shocks, along with accommodative monetary policy, have played more significant roles in shaping inflation dynamics.

Suggested Citation

  • Takeki Sunakawa, 2025. "Fiscal Inflation in Japan: The Role of Unfunded Fiscal Shocks," IMES Discussion Paper Series 25-E-14, Institute for Monetary and Economic Studies, Bank of Japan.
    • Handle: RePEc:ime:imedps:25-e-14
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    File URL: https://www.imes.boj.or.jp/research/papers/english/25-E-14.pdf
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    References listed on IDEAS

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    1. Thomas J. Sargent & Neil Wallace, 1984. "Some Unpleasant Monetarist Arithmetic," Palgrave Macmillan Books, in: Brian Griffiths & Geoffrey E. Wood (ed.), Monetarism in the United Kingdom, pages 15-41, Palgrave Macmillan.
    2. Woodford, Michael, 1994. "Monetary Policy and Price Level Determinacy in a Cash-in-Advance Economy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 4(3), pages 345-380.
    3. Sims, Christopher A, 1994. "A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 4(3), pages 381-399.
    4. Yasuo Hirose & Takeki Sunakawa, 2015. "Parameter bias in an estimated DSGE model: does nonlinearity matter?," CAMA Working Papers 2015-46, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    5. Jing Cynthia Wu & Fan Dora Xia, 2016. "Measuring the Macroeconomic Impact of Monetary Policy at the Zero Lower Bound," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(2-3), pages 253-291, March.
    6. Leo Krippner, 2015. "A Theoretical Foundation for the Nelson–Siegel Class of Yield Curve Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 30(1), pages 97-118, January.
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    Cited by:

    1. Tomomi Miyazaki & Haruo Kondoh & Huanhuan Guo & Naoto Tanemoto, 2025. "Effects of Fiscal Policy on Employment under the Zero Lower Bound in Japan: An Empirical Investigation with Gender and Regional Heterogeneity," Discussion Papers 2524, Graduate School of Economics, Kobe University.

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    More about this item

    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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