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The Optimum Quantity of Debt for Japan

Tomoyuki Nakajima () and Shuhei Takahashi

No 964, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: Japans 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)
Pages: 28pages
Date: 2017-02
New Economics Papers: this item is included in nep-dge and nep-mac
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Journal Article: The optimum quantity of debt for Japan (2017) Downloads
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Working Paper: The Optimum Quantity of Debt for Japan (2017) Downloads
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