Fiscal sustainability in Japan

Masaya Sakuragawa and Kaoru Hosono

Journal of the Japanese and International Economies, 2011, vol. 25, issue 4, 434-446

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.

Keywords: Fiscal sustainability; Low interest rate; Dynamic stochastic general equilibrium model; Intermediation cost (search for similar items in EconPapers)
JEL-codes: E37 E62 H30 H60 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (21)

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Chapter: Fiscal Sustainability in Japan (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jjieco:v:25:y:2011:i:4:p:434-446

DOI: 10.1016/j.jjie.2011.10.002

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