Fiscal Policy under the Debt Feedback Rule: The Case of Japan

Jun-Hyung Ko and Hiroshi Morita ()
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Hiroshi Morita: Graduate School of Economics, Hitotsubashi University

Economics Bulletin, 2011, vol. 31, issue 3, 2373-2387

Abstract: The Japanese government has amassed a huge amount of gross public debts over the past several decades. However, previous empirical works dealing with vector auto-regression (VAR) have not considered the effect of debt on fiscal policy and the macro economy. In this paper, we incorporate debt dynamics in a VAR model in the spirit of Favero and Giavazzi (2007, 2011). The inclusion of the debt feedback rule in VAR can help overcome the misspecification problem and provide direction toward a more relevant debt path and fiscal stance. The main findings of our study are as follows. First, in the pre-bubble period, the fiscal authority in Japan increased the primary surplus when the public debt level was high. However, this Ricardian behavior was not seen in the post-bubble period. Second, the impulse response functions to the expansionary government spending shock reveal that the stance of fiscal policy was more active in the pre-bubble. Third, while the forecast of debt dynamics in the pre-bubble period was stable, it became explosive in the post-bubble period.

Keywords: fiscal policy; Japan's public debt; VAR (search for similar items in EconPapers)
JEL-codes: E3 H3 (search for similar items in EconPapers)
Date: 2011-08-23
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Citations: View citations in EconPapers (3)

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