Fiscal Policy in a Permanent Liquidity Trap: Evidence from Japan

Alice Albonico, Guido Ascari and Alessandro Gobbi

No 566, Working Papers from University of Milano-Bicocca, Department of Economics

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 in ation. 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; active and passive fiscal policy; fiscal multipliers; Japan. (search for similar items in EconPapers)
JEL-codes: E52 E62 H63 (search for similar items in EconPapers)
Pages: 35
Date: 2026-01
References: Add references at CitEc
Citations:

Downloads: (external link)
http://repec.dems.unimib.it/repec/pdf/mibwpaper566.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:mib:wpaper:566

Access Statistics for this paper

More papers in Working Papers from University of Milano-Bicocca, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Matteo Pelagatti ().