Passive Savers and Fiscal Policy Effectiveness in Japan

Kenneth Kuttner and Adam Posen

No WP02-2, Working Paper Series from Peterson Institute for International Economics

Abstract: The efficacy of fiscal policy in Japan in the last decade has been a subject of considerable dispute, and the coincidence of mounting deficits and continued stagnation has led some to conclude that fiscal policy was ineffective. This paper finds ample support for the opposite conclusion: exogenous fiscal policy shocks (as derived from a structural vector-autoregression model) had pronounced real effects in Japan. Expansionary fiscal policy was expansionary, and contractionary policy contractionary, consistent with the implications of conventional macroeconomic theory. A historical decomposition shows that Japan's burgeoning public debt stems almost entirely from the recession-caused slowdown in revenue growth, and that fiscal policy was at times procyclical rather than consistently expansionary. Direct examination of the long-run relationship between private saving, taxes, and spending confirms that any Ricardian effects of future public liabilities on saving were insufficient to offset the direct first-order effects of taxes and public expenditures. The passivity of Japanese savers therefore seems to have contributed to the efficacy of fiscal policy; otherwise, some combination of increased saving, capital outflow, and higher interest rates would have diminished its impact.

Keywords: Fiscal Policy; Japan; Ricardian Equivalence; Budget Deficits (search for similar items in EconPapers)
JEL-codes: E21 E62 H31 H63 (search for similar items in EconPapers)
Date: 2002-05
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (40)

Downloads: (external link)
https://www.piie.com/publications/working-papers/p ... -effectiveness-japan (text/html)

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:iie:wpaper:wp02-2

Access Statistics for this paper

More papers in Working Paper Series from Peterson Institute for International Economics Contact information at EDIRC.
Bibliographic data for series maintained by Peterson Institute webmaster ().