Fiscal policy reaction in japan
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The University of the Free State. Fiscal Policy Reaction in Japan. Presentation by Evelina Niishinda B.Com Honours: Economics 29 October 2010. Structure of presentation. Objectives Literature Method Empirical results Conclusion. I. Objectives. Primary objective

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Fiscal Policy Reaction in Japan

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Fiscal policy reaction in japan

The University of the Free State

Fiscal Policy Reaction in Japan

Presentation by EvelinaNiishinda

B.Com Honours: Economics

29 October 2010


Structure of presentation

Structure of presentation

  • Objectives

  • Literature

  • Method

  • Empirical results

  • Conclusion


I objectives

I. Objectives

  • Primary objective

  • Determine how Japanese government respond to its public debt/GDP ratio

  • Secondary objective

  • Estimate fiscal reaction function

  • Test for public debt sustainability


Ii literature

II. Literature

  • Public debt/GDP ratio

    -Japan is one of the OECD countries with the highest public debt/GDP ratio (Burger, unpublished article)

  • Ratio following an upward trend since 1970

  • Late 1990s to early 2000s, ratio = 90% (Tokuoka, 2010)

  • 2008/2009, ratio = 189% (CIA world fact book, 2010)


Literature cont

Literature cont…

  • Cause of increase in debt is debatable

  • Expansionary fiscalpolicy (Kuttnerand Posen, 2002) increase in primary deficit

  • Increase in bond issue (Kang, 2010)

  • Lower government revenue due to aging population.

  • Fiscal rules (Von Hangen, 2005., Burger and Jimmy, 2006):

  • 1981 - Fiscal Consolidation Agreement

  • 1991/92 - Fiscal Restructuring Targets

  • 2002 - Reform and Perspective Programme


Iii method

III. Method

  • Two methods, GMM and VAR to estimate fiscal reaction function.

  • OECD data, 1970-2008

  • Fiscal reaction Function:

    - >0: government respond to increase in public debt/GDP ratio by increasing primary surplus.


Method cont

Method Cont...

  • Debt sustainability

  • Determined by the relationship between real growth(g) and real interest rate(r).

  • Condition:

  • If r>g, government need to run primary surplus

  • If r<g, can run primary deficit without putting pressure on debt/GDP ratio.


Iv empirical results

IV. Empirical results

  • Stationarity tests

    Table 1


Empirical results cont

Empirical results cont....

  • Fiscal reaction function

    Table 2, GMM estimation.


Empirical results cont1

Empirical results cont….

  • Results provide positive but weak reaction of primary balance to changes in the debt/GDP ratio.

  • CAPBYP coefficient, =1.208, shows that primary balance is an explosive random walk process.


Empirical results cont2

Empirical results cont…..

Table 3:Vector Auto Regression estimates. In parenthesis, t-ratios


Empirical results cont3

Empirical results cont….

  • From CAPBY equation, only CAPBY at lag 1 and 2 are statistically significant at 5%.

  • Output gap is statistically significant at 10%

  • Negative output gap coefficient means that Japan fiscal policy is procyclical.


Impulse responses

Impulse responses


Debt gdp ratio is it has it been sustainable

Debt/GDP ratio. Is it/has it been sustainable?

  • Figure3: CAPBY, real GDP growth and real interest

  • R > G, run primary surplus

  • R< G, can run primary deficit


V conclusion

V. Conclusion

  • Government respond to the increase in public/debt GDP ratio by increasing their primary surplus (increase insignificant).

  • Results show evidence of unsustainable public debt/GDP ratio.


Thank you

Thank you


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