Fiscal Policy in a Permanent Liquidity Trap: Evidence from Japan

Alice Albonico, Guido Ascari and Alessandro Gobbi

No 21014, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We consider a medium-scale macroeconomic model where the zero lower bound on interest rates remains binding permanently. We estimate the model for the Japanese economy, encompassing both active and passive fiscal policy scenarios. Our findings reveal a predominantly passive fiscal policy stance during the period spanning from 1995 to 2023. We compute fiscal multipliers for various policy instruments, showing that under the backdrop of passive fiscal policy: i) multipliers are lower than in an active fiscal policy regime; ii) government spending multipliers remain below one; iii) tax reductions can be associated with a decrease in output and inflation. A counterfactual analysis suggests that a more active fiscal policy would have resulted in a higher price level without increasing output volatility.

Keywords: permanent liquidity trap; Indeterminacy; Fiscal policy; Fiscal multipliers; Japan (search for similar items in EconPapers)
JEL-codes: E52 E62 H63 (search for similar items in EconPapers)
Date: 2026-01
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