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Stock Price Targeting and Fiscal Deficit in Japan: Why Did the Fiscal Deficit Increase . during Japan's Lost Decades?

  • Shin-ichi Fukuda

    (Faculty of Economics, University of Tokyo)

  • Junji Yamada

    (Graduate School of Economics, University of Tokyo)

The purpose of this paper is to explain why Japan's fiscal deficit increased so dramatically in the 1990s and the 2000s. We focus on the role of "stock price targeting" to explain why the fiscal expenditure increased so much. After presenting a simple model to describe government behavior with an optimistic view about stock price and output growth, the paper tests whether the model can explain Japan's fiscal expenditure. The empirical results, using biannual and highfrequency data of the 1990s and the 2000s, show that the stock price targeting can track Japan's fiscal expenditure reasonably well, especially in the 1990s. They imply that without the stock price targeting, the total amount of biannual fiscal stimulus from 1992 to 2000 would have been lower by 2.5 trillion yen on average.

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File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2011/2011cf819.pdf
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Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-819.

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Length: 36 pages
Date of creation: Oct 2011
Date of revision:
Handle: RePEc:tky:fseres:2011cf819
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  1. Robert J. Barro & Charles J. Redlick, 2009. "Macroeconomic Effects from Government Purchases and Taxes," NBER Working Papers 15369, National Bureau of Economic Research, Inc.
  2. Troy Davig & Eric M. Leeper, 2009. "Monetary-fiscal policy interactions and fiscal stimulus," Research Working Paper RWP 09-12, Federal Reserve Bank of Kansas City.
  3. Valerie A. Ramey, 2011. "Identifying Government Spending Shocks: It's all in the Timing," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 1-50.
  4. Doi, Takero & Ihori, Toshihiro, 2002. "Fiscal Reconstruction and Local Interest Groups in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 16(4), pages 492-511, December.
  5. Shin-ichi Fukuda & Jun-ichi Nakamura, 2010. "Why Did "Zombie" Firms Recover in Japan?," CIRJE F-Series CIRJE-F-751, CIRJE, Faculty of Economics, University of Tokyo.
  6. Martin S. Feldstein, 2009. "Rethinking the Role of Fiscal Policy," NBER Working Papers 14684, National Bureau of Economic Research, Inc.
  7. Christina D. Romer & David H. Romer, 2007. "The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks," NBER Working Papers 13264, National Bureau of Economic Research, Inc.
  8. Bayoumi, Tamim, 2000. "The Morning After: Explaining The Slowdown In Japanese Growth In The 1990s," CEPR Discussion Papers 2436, C.E.P.R. Discussion Papers.
  9. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization Of The Dynamic Effects Of Changes In Government Spending And Taxes On Output," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1329-1368, November.
  10. Miyazaki, Tomomi, 2010. "The effects of fiscal policy in the 1990s in Japan: A VAR analysis with event studies," Japan and the World Economy, Elsevier, vol. 22(2), pages 80-87, March.
  11. Ihori, Toshihiro & Doi, Takero & Kondo, Hiroki, 2001. "Japanese fiscal reform: fiscal reconstruction and fiscal policy," Japan and the World Economy, Elsevier, vol. 13(4), pages 351-370, December.
  12. Fukuda, Shinichi & Teruyama, Hiroshi, 1994. "The Sustainability of Budget Deficits in Japan," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 35(2), pages 109-119, December.
  13. Ludger Schuknecht & Albert Jaeger, 2004. "Boom-Bust Phases in Asset Prices and Fiscal Policy Behavior," IMF Working Papers 04/54, International Monetary Fund.
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