MACROECONOMIC VOLATILITY UNDER HIGH ACCUMULATION OF GOVERNMENT DEBT: LESSONS FROM JAPAN

Paul McNelis () and Naoyuki Yoshino ()

Advances in Complex Systems (ACS), 2012, vol. 15, issue supp0, 1-29

Abstract: This paper applies Bayesian estimation to an open-economy Dynamic Stochastic General Equilibrium (DSGE) model of Japan, to assess the effects of expanding government debt on interest rates, real exchange rate dynamics, and real sector performance. We find that the emergence of even a small risk premium on government debt will trigger considerable instability in the real and nominal variables. We show that a switch to an exchange-rate rule for monetary policy would considerably moderate the instability induced by a rising risk premium.

Keywords: Risk premium; Bayesian estimation; financial instability (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (5)

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Chapter: Macroeconomic Volatility Under High Accumulation of Government Debt: Lessons from Japan (2017)
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DOI: 10.1142/S0219525912500579

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