Fiscal and Monetary Policies Interaction in Crisis: An Insight Into Japan

Tran Thi Kim Oanh

SAGE Open, 2024, vol. 14, issue 1, 21582440241228656

Abstract: In this study, we explore the interaction between fiscal and monetary policies in Japan over a period including the Global Financial Crisis (GFC) and a phase of the Covid-19 pandemic under the presupposition that policy regimes are fixed and there are random switches between the two regimes. Using the Regime switching model, the results show that fiscal policy is more active in Japan than monetary policy, especially during the GFC and the Covid-19 pandemic. By using the Bayesian VAR model, we continue to further analyze the response of macroeconomic factors to an expansionary fiscal policy to verify the above findings once again. The results indicate that government expenditure helps boost the economy in the short-run. The positive impact of a government expenditure shock on GDP, PPI, and Investment lasts about three to four quarters, while private consumption only increases in one next quarter. These positive responses can increase the inflation rate and make the local currency overvalued, reflected in the increase in the effective exchange rate. A fiscal policy shock does not have much impact on the monetary policy, specifically, the money supply and interest rates of long-term government bonds still tended to decrease as expected by Japan. This is the basis for studying policy implications for some countries pursuing similar policies to Japan. JEL Classification : C23, C54, E42, E62, E63

Keywords: fiscal—monetary policy interactions; Bayesian VAR model; regime—switching (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:sae:sagope:v:14:y:2024:i:1:p:21582440241228656

DOI: 10.1177/21582440241228656

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