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

Naoyuki Yoshino, Tetsuro Mizoguchi, Farhad Taghi Zadeh Hesary

Research output: Contribution to journalReview articlepeer-review

1 Citation (Scopus)

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
Externally publishedYes

Keywords

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

ASJC Scopus subject areas

  • Business and International Management
  • Economics and Econometrics

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