Causes of Fiscal Multiplier Decline in Japan

Tsuyoshi Mihira
Additional contact information
Tsuyoshi Mihira: Associate Professor, Faculty of Economics, Toyo University

Public Policy Review, 2021, vol. 17, issue 2, 1-41

Abstract: In this paper we investigated the causes of recent decline in the Japanese fiscal multiplier. We first listed possible causes of multiplier decline based on a standard macroeconomic model (AD-AS Mundell-Fleming model). We then examined them one by one using basic statistical data and related preceding studies. We conclude that the causes of multiplier decline are: 1) decrease of consumption propensity, 2) increase of income tax rate, 3) decrease of investment propensity, 4) decrease of expected growth rate, and 5) increase of import propensity. On the other hand, 6) the crowding out effect, 7) the price adjustment effect, and 8) the Mundell-Fleming effect are unlikely to be the causes of recent multiplier decline. Rather, 6) to 8) might be working in the direction of increasing the multiplier under current deflation and zero interest rate environment. The underlying factors behind 1) to 5) are: the aging of the population and the resulting rise in tax and social insurance burdens; expanding fiscal deficit and the accompanying concern about future tax increase; decline in potential growth rate; and the progress of economic globalization. All these factors are historical trends in the current Japanese economy and unlikely to revert anytime soon. Therefore, it seems difficult to expect the declined fiscal multiplier to recover in the near future.

Keywords: fiscal policy; multiplier effect; consumption propensity; anxiety about social security; fiscal deficit; aging population (search for similar items in EconPapers)
JEL-codes: E12 E21 E22 E62 H31 H32 H62 (search for similar items in EconPapers)
Date: 2021
References: View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.mof.go.jp/english/pri/publication/pp_review/ppr17_02_05.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:mof:journl:ppr17_02_05

Access Statistics for this article

More articles in Public Policy Review from Policy Research Institute, Ministry of Finance Japan Contact information at EDIRC.
Bibliographic data for series maintained by Policy Research Institute ().