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The Optimum Quantity of Debt for Japan

Tomoyuki Nakajima () and Shuhei Takahashi

No 75, UTokyo Price Project Working Paper Series from University of Tokyo, Graduate School of Economics

Abstract: Japan's net government debt reached 130% of GDP in 2013. The present paper analyzes the welfare implications of the large debt for Japan. We use an Aiyagari (1994)-style heterogeneous-agent, incomplete-market model with idiosyncratic wage risk and endogenous labor supply. We find that under the utilitarian welfare measure, the optimal government debt for Japan is -50% of GDP and the current level of debt incurs the welfare cost that is 0.22% of consumption. Decomposing the welfare cost by the Floden (2001) method reveals substantial welfare effects arising from changes in the level, inequality, and uncertainty. The level and inequality costs are 0.38% and 0.52% respectively, whereas the uncertainty benefit is 0.68%. Adjusting consumption taxes instead of the factor income taxes to balance the government budget substantially reduces the overall welfare cost.

Keywords: Government debt; welfare; incomplete markets; Japanese economy. (search for similar items in EconPapers)
JEL-codes: E62 H63 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2017-03
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
Working Paper: The Optimum Quantity of Debt for Japan (2017) Downloads
Working Paper: The Optimum Quantity of Debt for Japan (2017) Downloads
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