Optimal fiscal policy rule for achieving fiscal sustainability: The Japanese case

Naoyuki Yoshino, Tetsuro Mizoguchi, Farhad Taghi Zadeh Hesary

    Research output: Contribution to journalReview article

    Abstract

    Japan's debt-to-GDP ratio is the highest among OECD countries. While the Domar condition and Bohn's conditions are often used in the literature to check whether a government's debt situation is in a dangerous zone, this paper shows that the Domar condition is obtained only from the supply of government bonds without consideration of the demand side. In addition, Bohn's condition satisfies the stability of the government budget in the long run and even if the condition is satisfied, the recovery of the economy may not be achieved. This paper proposes a new condition considering both the demand and supply of the bond market that satisfies both the stability of the government budget and the recovery of the economy. The empirical findings show that to achieve fiscal sustainability, both sides of the Japanese Government budget (expenditure and revenue) need to be adjusted simultaneously and the decrease in government expenditure has to be more than the increase in tax revenue.

    Original languageEnglish
    Pages (from-to)156-173
    Number of pages18
    JournalGlobal Business and Economics Review
    Volume21
    Issue number2
    Publication statusPublished - 2019 Jan 1

    Fingerprint

    Fiscal policy rules
    Optimal fiscal policy
    Government budget
    Fiscal sustainability
    Tax revenues
    Government bonds
    Japan
    Revenue
    Government debt
    Expenditure
    OECD countries
    Government expenditure
    Demand and supply
    Bond market
    Debt

    Keywords

    • Fiscal policy rule
    • Fiscal sustainability
    • Government debt management
    • Japanese bond market

    ASJC Scopus subject areas

    • Business and International Management
    • Economics and Econometrics

    Cite this

    Optimal fiscal policy rule for achieving fiscal sustainability : The Japanese case. / Yoshino, Naoyuki; Mizoguchi, Tetsuro; Taghi Zadeh Hesary, Farhad.

    In: Global Business and Economics Review, Vol. 21, No. 2, 01.01.2019, p. 156-173.

    Research output: Contribution to journalReview article

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