TY - JOUR
T1 - Japanese government debt and sustainability of fiscal policy
AU - Doi, Takero
AU - Hoshi, Takeo
AU - Okimoto, Tatsuyoshi
N1 - Funding Information:
We thank Shin-ichi Fukuda, Yasushi Iwamoto, Hugh Patrick and two anonymous referees for valuable suggestions. We also thank participants of the 23rd NBER-TCER-CEPR Conference at University of Tokyo and the 12th annual conference of the Association for Public Economic Theory at Indiana University and seminars at University of California, San Diego and Australian National University for helpful comments. Doi has received a financial support from the Grant-in-Aid for Specially Promoted Research from Japan’s Ministry of Education, Culture, Sports, Science and Technology: “Economic Analysis of Intergenerational Issues: Searching for Further Development” (Grant Number 22000001). All remaining errors are our own.
PY - 2011/12
Y1 - 2011/12
N2 - 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.
AB - 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.
KW - Active policy
KW - Debt to GDP ratio
KW - Markov switching model
KW - Minimum tax rate for fiscal sustainability
KW - Passive policy
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U2 - 10.1016/j.jjie.2011.09.006
DO - 10.1016/j.jjie.2011.09.006
M3 - Article
AN - SCOPUS:82955203257
VL - 25
SP - 414
EP - 433
JO - Journal of the Japanese and International Economies
JF - Journal of the Japanese and International Economies
SN - 0889-1583
IS - 4
ER -