Japanese government debt and sustainability of fiscal policy

Takero Doi, Takeo Hoshi, Tatsuyoshi Okimoto

Research output: Contribution to journalArticle

48 Citations (Scopus)

Abstract

We construct quarterly series of the revenues, expenditures, and debt outstanding for Japan from 1980 to 2010, and analyze the sustainability of the fiscal policy. We pursue three approaches to examine the sustainability. First, we calculate the minimum tax rate that stabilizes the debt to GDP ratio given the future government expenditures. Using 2010 as the base year, we find that the government revenue to GDP ratio must rise permanently to 40-47% (from the current 33%) to stabilize the debt to GDP ratio. Second, we estimate the response of the primary surplus when the debt to GDP ratio increases. We allow the relationship to fluctuate between two " regimes" using a Markov switching model. In both regimes, the primary surplus to GDP ratio fails to respond positively to debt, which suggests the process is explosive. Finally, we estimate a fiscal policy function and a monetary policy function with Markov switching. We find that the fiscal policy is " active" (the tax revenues do not rise when the debt increases) and the monetary policy is " passive" (the interest rate does not react to the inflation rate sufficiently) in both regimes. These results suggest that the current fiscal situation for the Japanese government is not sustainable.

Original languageEnglish
Pages (from-to)414-433
Number of pages20
JournalJournal of The Japanese and International Economies
Volume25
Issue number4
DOIs
Publication statusPublished - 2011 Dec 1

Keywords

  • Active policy
  • Debt to GDP ratio
  • Markov switching model
  • Minimum tax rate for fiscal sustainability
  • Passive policy

ASJC Scopus subject areas

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

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