TY  - JOUR
AU  - Doi, Takero
AU  - Hoshi, Takeo
AU  - Okimoto, Tatsuyoshi
TI  - Japanese Government Debt and Sustainability of Fiscal Policy
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 17305
PY  - 2011
Y2  - August 2011
DO  - 10.3386/w17305
UR  - http://www.nber.org/papers/w17305
L1  - http://www.nber.org/papers/w17305.pdf
N1  - Author contact info:
Takero Doi
Faculty of Economics
Keio University
Mita 2-15-45, Minato-ku
Tokyo 108-8345
JAPAN
Tel: +81-3-3453-4511
Fax: +81-3-5427-1578
E-Mail: tdoi@econ.keio.ac.jp

Takeo Hoshi
University of Tokyo
7-3-1 Hongo
Bunkyo-ku, Tokyo 113-0033
Japan
Tel: +81-3-5841-5611
E-Mail: hoshireiwa@gmail.com

Tatsuyoshi Okimoto
Australia
E-Mail: tatsuyoshi.okimoto@anu.edu.au
M1  - published as Takero Doi, Takeo Hoshi, Tatsuyoshi Okimoto. "Japanese Government Debt and Sustainability of Fiscal Policy," in Shin-ichi Fukuda, Takeo Hoshi, and Eric Leeper, organizers, "Fiscal Policy and Crisis" Journal of the Japanese and International Economies, 25(4), December 2011 (2011)

AB  - We construct quarterly series of the revenues, expenditures, and debt outstanding for Japan from 1980 to 2010, and analyze the sustainability of the fiscal policy.  We pursue three approaches to examine the sustainability.  First, we calculate the minimum tax rate that stabilizes the debt to GDP ratio given the future government expenditures.  Using 2010 as the base year, we find that the government revenue to GDP ratio must rise permanently to 40%-47% (from the current 33%) to stabilize the debt to GDP ratio.  Second, we estimate the response of the primary surplus when the debt to GDP ratio increases.  We allow the relationship to fluctuate between two "regimes" using a Markov switching model.  In both regimes, the primary surplus to GDP ratio fails to respond positively to debt, which suggests the process is explosive.  Finally, we estimate a fiscal policy function and a monetary policy function with Markov switching.  We find that the fiscal policy is "active" (the tax revenues do not rise when the debt increases) and the monetary policy is "passive" (the interest rate does not react to the inflation rate sufficiently) in both regimes.  These results suggest that the current fiscal situation for the Japanese government is not sustainable.
ER  -