Fiscal sustainability in Japan

Masaya Sakuragawa, Kaoru Hosono

Research output: Contribution to journalArticle

18 Citations (Scopus)

Abstract

This paper investigates fiscal sustainability of Japan by providing a dynamic stochastic general equilibrium (DSGE) model that features the low interest rate of the government bond relative to the economic growth rate to mimic the actual data. We evaluate fiscal sustainability by investigating whether the expected path of the debt-to-GDP ratio stabilizes or increases without bound. The debt-to-GDP ratio depends crucially on the projected growth rate and the fiscal policy rule. If the government does not react to the current fiscal crisis, the debt-to-GDP ratio will increase without bound, and then the fiscal policy is not sustainable. If the fiscal rule uses Bohn's (1998) idea that involves the response of the primary surplus to the debt, sustainability improves. This rule provides a useful and realistic reform plan in the short and long runs.

Original languageEnglish
Pages (from-to)434-446
Number of pages13
JournalJournal of The Japanese and International Economies
Volume25
Issue number4
DOIs
Publication statusPublished - 2011 Dec 1

Keywords

  • Dynamic stochastic general equilibrium model
  • Fiscal sustainability
  • Intermediation cost
  • Low interest rate

ASJC Scopus subject areas

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

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