The optimum quantity of debt for Japan

Tomoyuki Nakajima and Shuhei Takahashi

Journal of the Japanese and International Economies, 2017, vol. 46, issue C, 17-26

Abstract: Japan’s net government debt is 130% of GDP in 2013. The present paper analyzes the effect of the large government debt on welfare. We use a heterogeneous agent, incomplete markets model with idiosyncratic wage risk, a borrowing constraint, and endogenous labor supply. We calibrate the model to the Japanese economy using evidence based on macro-level and micro-level data. We find that the optimal level of government debt is –50% of GDP for Japan. The welfare cost of keeping government debt to 130% of GDP rather than the optimal level is 0.19% of consumption.

Keywords: Government debt; Welfare; Incomplete markets; Inequality; Uncertainty; Japanese economy (search for similar items in EconPapers)
JEL-codes: E62 H63 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (7)

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Working Paper: The Optimum Quantity of Debt for Japan (2017)
Working Paper: The Optimum Quantity of Debt for Japan (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jjieco:v:46:y:2017:i:c:p:17-26

DOI: 10.1016/j.jjie.2017.08.002

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