Fiscal policy switching in Japan, the US, and the UK

Arata Ito, Tsutomu Watanabe, Tomoyoshi Yabu

Research output: Contribution to journalArticle

15 Citations (Scopus)

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 US and the UK which indicate that in these countries the government's fiscal behavior is consistently characterized by Ricardian policy.

Original languageEnglish
Pages (from-to)380-413
Number of pages34
JournalJournal of The Japanese and International Economies
Volume25
Issue number4
DOIs
Publication statusPublished - 2011 Dec

Keywords

  • Fiscal discipline
  • Fiscal policy rule
  • Markov-switching regression

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics
  • Political Science and International Relations

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