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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

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-Japan is one of the OECD countries with the highest public debt/GDP ratio (Burger, unpublished article)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