Deficit Spending in the Nazi Recovery, 1933–1938: A Critical Reassessment

This paper examines the effects of deficit spending and work-creation on the Nazi recovery, employing archival data on the public deficit and modern time series techniques. Although deficit spending was tried and full employment was reached within four years, the fiscal impulse generated by the deficits does not appear to have driven the speed of recovery. VAR forecasts of output using fiscal and monetary policy instruments suggest only a minor role for active policy during the recovery. Nazi policies deliberately crowded out private demand to ensure high rates of rearmament. Military spending dominated civilian work-creation already in 1934. Investment in autobahn construction was minimal during the recovery and gained momentum only in 1936 when full employment was approaching. Continued fiscal and monetary expansion after that date may have prevented the economy from sliding back into recession. We find some effects of the Four Years Plan of late 1936, which boosted government deficits further and tightened public control over the economy. J. Japan. Int. Econ., December 2002, 16(4), pp. 559–582. School of Business and Economics, Humboldt University of Berlin, Spandauer Strasse 1, D-10178 Berlin, Germany; and CEPR. © 2002 Elsevier Science (USA).Journal of Economic Literature Classification Numbers: N44, N14, E52, E47, E65, E27.     

The Fiscal Investment and Loan Program in Transition

This paper discusses the adequacy of the activities of the Fiscal Investment Loan Program (FILP) agencies after the fundamental reform in April 2001, which disconnected postal savings and public pension reserves from the FILP. It is found that many ideas of justifying the government interventions to the financial sector have now lost their relevancy. The activity of government financial intermediaries should be streamlined. Among infrastructure construction projects, the most serious part of welfare loss lies on national motorway construction, which is estimated to be about 14.5 trillion yen of welfare loss. J. Japan. Int. Econ., December 2002, 16(4), pp. 583–604. Department of Economics, Hitotsubashi University, Kunitachi, 186-8601, Japan; and TCER. © 2002 Elsevier Science (USA).Journal of Economic Literature Classification Numbers: H81, H54, R42.     

To Spend the U.S. Government Surplus or to Increase the Deficit? A Numerical Analysis of the Policy Options

This paper provides a numerical analysis of the likely benefits from adopting alternative ways of reducing the projected fiscal surplus (as of the summer 2001) in the United States economy. Calibrating a small growth model, our results suggest that investing the surplus in public capital is likely to yield the greatest long-run welfare gains, although decreasing the capital income tax is only marginally inferior. Both these options dominate increasing government consumption expenditure or decreasing the tax on labor income. By shifting resources from consumption toward capital the two superior policies involve sharp intertemporal tradeoffs in welfare; significant short-run welfare losses are more than compensated by large long-run welfare gains. By contrast, the two inferior options are gradually welfare-improving through time. A crucial factor in determining the benefits of reducing the government surplus through spending is the size of the government sector relative to the social optimum. We find that the second-best optimum is to increase both forms of government expenditure to their respective social optima, while at the same time restructuring taxes by reducing the tax on capital and raising the tax on wage income to achieve the targeted reduction in the surplus. J. Japan. Int. Econ., December 2002, 16(4), pp. 405–435. Department of Economics, University of Washington, Seattle, Washington; and Department of Economics, Terry College of Business, University of Georgia, Atlanta, Georgia. © 2002 Elsevier Science (USA).Journal of Economic Literature Classification Numbers: E62, O41.     

Fiscal Reconstruction and Local Interest Groups in Japan

This paper investigates the politicoeconomic properties of the fiscal reconstruction process in Japan by analyzing the dynamic game among local interest groups with concessions of region-specific privileges. Free-riding behavior of local interest groups brings numerous deficits. Our empirical evidence indicates that local privileges were powerful in the 1990s, which is the main reason fiscal reconstruction did not perform very well in the 1990s. J. Japan. Int. Econ., December 2002, 16(4), pp. 492–511. Faculty of Economics, Keio University, and Graduate School of International Relations and Pacific Studies, University of California, San Diego; and Department of Economics, University of Tokyo, Hongo, Tokyo 113-0033, Japan, and Economic and Social Research Institute, Cabinet Office of Japan, 3-1-1 Kasumigaseki, Chiyoda-ku, Tokyo 100-8970, Japan. © 2002 Elsevier Science (USA).Journal of Economic Literature Classification Numbers: H41, F13, D62.     

Transition from School to Work in Japan

Using retrospective data of young people's work experience in Japan, this paper found that initial labor market conditions, i.e., when workers first enter the labor market after permanently leaving school, have a significant lasting impact on the employment experiences of workers in their teens and twenties. An increase in the unemployment rate at the time of labor market entry reduces the probability of gaining full-time regular employment and, more important, increases the future probability of workers of leaving employers by lowering the quality of job matches. It was also found that the vocational guidance or recommendations workers received at school could be effective in raising the quality of job matches. The adverse effect of initial unemployment rates on employment opportunities was most profoundly observed among female college graduates. J. Japan. Int. Econ., December 2001, 15(4), pp. 465–488. Faculty of Economics, Gakushuin University, 1-5-1 Mejiro Toshima-ku, Tokyo 171-8588, Japan; and Faculty of Economics, Meiji Gakuin University, 1-2-37 Shirokane-dai Minato-ku, Tokyo 108-8636, Japan. © 2001 Elsevier Science (USA).Journal of Economic Literature Classification Numbers: J24, J63, J64.     

Unemployment and Labor Market Institutions: An Empirical Analysis

The development of the unemployment rate differs substantially between OECD countries. In this paper we investigate to what extent these differences are related to labor market institutions. In our analysis we use data of eighteen OECD countries over the period 1960–1994 and show that the way in which institutions interact is important. J. Japan. Int. Econ., December 2001, 15(4), pp. 403–418. Department of Economics, CentER, Tilburg University and Institute for Labour Studies (OSA), The Netherlands. © 2001 Elsevier Science (USA).Journal of Economic Literature Classification Numbers: E24, J68.     

Fluctuations in Unemployment and Industry Labor Markets

Throughout the 1990s, and particularly in the mid- to late-1990s, the Japanese employment situation went from bad to worse. We investigate the causes of rising unemployment in Japan, using data on individual workers from the “Special Survey of the Labor Force” between 1988 and 1999. This research focuses on the effect of labor market segmentation by industry on labor flows. Our findings reveal that unemployment in the construction industry and, more recently, in the service industry has contributed greatly to the national unemployment rate. We also find that most successful job transfers occur within the same industry, even though workers may experience some periods of unemployment. Finally, our results show that labor market conditions in each industry affect the probability that a worker will fall into unemployment as well as the probability that an unemployed worker will find new employment. These findings suggest that the Japanese labor market is segmented by industry and this segmentation contributed to the worsening unemployment in Japan. J. Japan. Int. Econ., December 2001, 15(4), pp. 437–464. Department of Economics, Dokkyo University, 1-1 Gakuen-cho, Soka-shi, Saitama 340-0042, Japan; Graduate School of Economics, Nagoya University, Furo-cho, Chikusa-ku, Nagoya, 464-8601, Japan. © 2001 Elsevier Science (USA).Journal of Economic Literature Classification Numbers: J63, J64.     

The End of Lifetime Employment in Japan?: Evidence from National Surveys and Field Research

Using both quantitative data from national surveys and qualitative data from our recent field research, this paper provides evidence on the recent transformation of Japan's celebrated practice of lifetime employment (or implicit long-term employment contracts for the regular workforce). Overall, contrary to the popular rhetoric of the end of lifetime employment, evidence points to the enduring nature of this practice in Japan. Specifically, we find little evidence for any major decline in the job retention rates of Japanese employees from the period prior to the burst of the bubble economy in the late 1980s to the post-bubble period. In general, our field research corroborates the main finding from the job retention rates by describing vividly that large firms in Japan have been trying to accomplish their restructuring and downsizing targets by relying heavily on transfers of their employees to their subsidiaries and related firms and hiring cuts, thus avoiding layoffs. Last, the burden of downsizing appears to fall disproportionately on young workers and middle-age workers with shorter tenure. J. Japan. Int. Econ., December 2001, 15(4), pp. 489–514. Department of Economics, Colgate University, Hamilton, New York 13346; Center on Japanese Economy and Business, Columbia Business School, New York; and TCER. © 2001 Elsevier Science (USA).Journal of Economic Literature Classification Numbers: J63, J64, J41, O53.     

Monetary Policy, Credit, and Real Activity: Evidence from the Balance Sheet of Japanese Firms

We analyze the mechanism of monetary transmission in the Japanese economy by using the quarterly time series data disaggregated by firm size. In particular we examine the channels through which monetary policy influences the firm's fixed investment with special focus on the firm's land. We estimate the vector autoregressive model where we encompass two competing hypotheses on the monetary transmission: monetary and credit channels. Our evidence is in support of the credit channel. We find that land has played a vital role in the monetary transmission, especially for small firms. Moreover, we find that fall of land value in 1990s weakened the efficacy of monetary policy considerably. J. Japan. Int. Econ., December 2000, 14(4), pp. 385–407. Institute of Social and Economic Research, Osaka University, Osaka, Japan Copyright 2000 Academic Press.Journal of Economic Literature Classification Numbers: E22, E32, E44, E51.     

Output-Inflation Trade-Off at Near-Zero Inflation Rates

The purpose of this paper is to provide new evidence about the cost of near-zero inflation using Japanese data. We test the hypothesis that the short-run Phillips curve becomes flatter as the rate of inflation approaches zero. In implementing the test, we pay special attention to how to control for other factors affecting the rate of inflation. First, we use the skewness of the distribution of relative-price changes as a measure of supply shocks. Second, we use information contained in the cross-prefecture Phillips curve to control for changes in the expected rate of inflation. Through a series of empirical analyses, we find evidences consistent with the hypothesis. In particular, we find that the estimated slope in the 1990s is smaller than before. J. Japan. Int. Econ., December 2000, 14(4), pp. 304–326. Research and Statistics Department, Bank of Japan and Institute of Economic Research, Hitotsubashi University. Copyright 2000 Academic Press.Journal of Economic Literature Classification Numbers: E31, E50     

Efficient Monetary Policy Design near Price Stability

Using dynamic programming methods, we study the design of optimal monetary policy in a simple, calibrated open-economy model and evaluate the effect of the liquidity trap generated by the zero bound on nominal interest rates. We show that the optimal policy near price stability is asymmetric. As inflation declines, policy turns expansionary sooner and more aggressively than would be optimal in the absence of the zero bound. This introduces an upward bias in the average level of inflation. We also discuss operational issues associated with the interpretation and implementation of policy at the zero bound in relation to the recent situation in Japan. J. Japan. Int. Econ., December 2000, 14(4), pp. 327–365. Board of Governors of the Federal Reserve System, Washington, D.C. 20551 Copyright 2000 Academic Press.Journal of Economic Literature Classification Numbers: E31, E52, E58, E61.     

The Role of Monetary Policy in Japan: A Break in the 1990s?

This article documents time series evidence suggesting the case for a possible structural break in the role of Japan's monetary policy during the 1990s. It uses a simple vector autoregressive framework and offers some suggestive results: While a persistent effect of monetary policy on real output is detected over the full sample of 1975–1998 and the subsample that ends in 1993, such effect disappears with the recent subsample of the 1990s. The stability analysis also provides more specified evidence that there is a break in the reduced form dynamic system in 1995. Some interpretations are offered to intuitively support these findings. J. Japan. Int. Econ., December 2000, 14(4), pp. 366–384. Research Institute for Economics and Business Administration, Kobe University, Rokko, Nada, Kobe 657-8501, Japan Copyright 2000 Academic Press.Journal of Economic Literature Classification Numbers: E52, E32.     

Should We Be Afraid of Friedman's Rule?

Should one think of zero nominal interest rates as an undesirable liquidity trap or as the desirable Friedman rule? I use three different frameworks to discuss this issue. First, I restate H. L. Cole and N. Kocherlakota's (1998, Fed. Res. Bank Minn. Quart. Rev., Spring, 2–10) analysis of Friedman's rule: short run increases in the money stock—whether through issuing spending coupons, open market operations, or foreign exchange intervention—change nothing as long as the money stock shrinks in the long run. Second, two simple Keynesian models of the inflationary process with a zero lower bound on nomianl interest rates imply either that deflationary spirals should be common or that a policy close to the Friedman rule and thus some deflation is optimal. Finally, a formal baby-sitting coop model implies multiple equilibria, but does not support the injection of liquidity to restore the good equilibrium, in contrast to P. Krugman (1998, Slate, August 13). J. Japan. Int. Econ., December 2000, 14(4), pp. 261–303. CenER, Tilburg University; Humboldt University, Berlin, Germany; and CEPR Copyright 2000 Academic Press.Journal of Economic Literature Classification Numbers: E31, E41, E50, E51, E52.     

The Competitive Impact of International Trade: The Case of Import Liberalization of the Japanese Oil Product Market

This paper analyzes the competitive impact of the recent import liberalization of the Japanese oil product market. In response to the import liberalization in March 1996, not only did the market price of gasoline decline sharply but also its domestic production kept rising and did not decline relative to imports. Moreover, its price fell substantially before the actual liberalization of the import. This paper demonstrates both theoretically and empirically that the theory of implicit cartel can explain such features of the impact of import liberalization very well. The paper also identifies the significantly positive welfare impact of such liberalization due to the expansion of supply in a market with a large tax wedge between price and cost and, possibly more importantly, due to the transformation of competitive conduct from unproductive investment for cartel-rent shifting into price cuts. J. Japan. Int. Econ., December 1999, 13(4), pp. 397–423. Hitotsubashi University; and Keio University. Copyright 1999 Academic Press.Journal of Economic Literature Classification Numbers: L40, F12, K21.     

The Pricing of Critical Applications in the Internet

A number of authors have recently proposed techniques for pricing access to Internet resources in the case of congestion. However, these approaches do not take into account the fact that some applications necessitate guaranteed capacity over a relatively long period of time. This paper discusses some elements of the theory of a mechanism that would accommodate such applications. We begin by reviewing both current practice and theory. We then build infinite horizon stationary models with asymmetry of information, which we first use to show the limits of smart markets (McKie-Mason and Varian). Finally, in a very simplified model, we compute the optimal mechanism, and in a specific example, we show that the optimal mechanism favors the high-type long-term user. J. Japan. Int. Econ., December 1999, 13(4), pp. 281–310. CNRS, IDEI, and GREMAQ, University of Toulouse 1, Toulouse F-31042, France; and University of Toulouse 1, Toulouse F-31042, France. Copyright 1999 Academic Press.Journal of Economic Literature Classification Numbers: C73, D44, D82, L96.     

Fiscal Consolidation and the Public Sector Balance Sheet in South Africa

Between 1994 and 2008 the South African government reduced its debt/GDP ratio from almost 50% to 27%. Unfortunately this reduction was accompanied by a significant decrease in government's fixed capital/GDP ratio from 90% to 55% – fiscal sustainability might have been restored, but government's balance sheet did not improve. A similar story can be told for State Owned Enterprises. Since the Great Recession the fiscal situation worsened markedly – the public debt ratio again approaches 50%. To restore fiscal sustainability this article suggests that the government faces two options: (1) to create room for future countercyclical policy, the government must cut current expenditure and reduce the public debt/GDP ratio to its pre‐crisis level, or (2) substitute much‐needed infrastructure capital expenditure for current expenditure while stabilising the debt/GDP ratio at its post‐crisis level. Given that the much lower fixed capital/GDP ratio inhibits economic growth, the latter option might be more sensible.     

Economic Integration of Countries with International Public Goods

This paper develops a model of economic integration that is subject to random emergency costs. To mitigate the effects of these disruptions, each country that belongs to a club provides an international public good. This paper incorporates voluntary provision of public goods into a rigorous general equilibrium model of economic integration under uncertainty. It is shown that an increase in the probability of war or the penalty ratio in a club may raise the welfare and the size of the club if risk aversion with respect to private consumption is not so large. J. Japan. Int. Econ., December 1994, 8(4), pp. 530–550. Department of Economics, University of Tokyo, Hongo, Tokyo 113, Japan; and Department of Economics, Osaka University, Toyonaka, Osaka 560, Japan.     

Tax Pot Episodes in OECD Countries

How to use an unexpected increase in tax revenues (tax pots) was an important issue in most OECD countries in the second half of the 1990s, the question being more precisely what to do with those windfall revenues: decrease taxes, reduce debt, increase expenditures? In this paper, we study such tax pot episodes in OECD countries over the past 40 years. To that end, we propose a definition of a fiscal pot episode. Once identification is complete, we examine the macroeconomic environment within in those episodes, the way this surplus of revenues has been used, and the degree of success in reducing public debt and in fostering growth. As in the fiscal adjustment literature, we then obtain relatively orthodox conclusions about the use of windfall tax revenues, as it is generally better for future growth and debt level to use the money to reduce expenditures and taxes. J. Japan. Int. Econ., December 2002, 16(4), pp. 436–461. University of Toulouse (IDEI), Toulouse, France; and University of Toulouse (GREMAQ, LEERNA, and IDEI), Toulouse, France, Institut Universitaire de France, and CEPR. © 2002 Elsevier Science (USA).Journal of Economic Literature Classification Numbers: E6, H6.     

Changes in the Sources of Modern Economic Growth: Japan Compared with the United States

The major question addressed in this paper is whether the pattern of economic growth based largely on capital accumulation preceded the pattern predominantly dependent on improvement in efficiency as measured by growth of total factor productivity. Observations on Japan extending back to the early phase of modern economic growth, together with those on the United States by Abramovitz, show that a shift from accumulation-based growth to efficiency-based growth occurred in Japan in the same manner as in U.S. economic history. This shift appears to have been associated with a change in the bias of technological progress from the use of physical capital to the use of human capital. Despite this similarity, economic growth in Japan has continued to depend more heavily on physical capital accumulation even since Japan's economy has reached a mature stage. The significant lag in shifting to efficiency-based growth seems to be characteristic of economic growth based on borrowed technology. This hypothesis is consistent with the similarity in growth patterns between Japan and newly industrializing economies in East Asia.J. Japan. Int. Econ., March 1999,13(1), pp. 1–21. School of International Politics, Economics and Business, Aoyama Gakuin University, Shibuya, Shibuya-ku, Tokyo 150-8366, Japan; and Japan Energy Research Institute, Toranomon 4-3-13, Minato-ku, Tokyo 105-0001, Japan.Copyright 1999 Academic Press.Journal of Economic LiteratureClassification Numbers: N15, O47, O57.     

Fiscal Policy Effectiveness in Japan

The effectiveness of fiscal policy in Japan over the past decade has been a matter of great controversy. We investigate the effectiveness of Japanese fiscal policy over the 1976–1999 period using a structural VAR analysis of real GDP, tax revenues, and public expenditures. We find that expansionary fiscal policy, whether in the form of tax cuts or of public works spending, had significant stimulative effects. Using a new method of computing policy multipliers from structural VARs, we calculate that the multiplier on tax cuts is about 25% higher at a four-year horizon than that on public works spending, though both are well in excess of one. A historical decomposition reveals that Japanese fiscal policy was contractionary over much of the 1990s, and a significant proportion of the variation in growth can be attributed to fiscal policy shocks; accordingly, most of the run-up in public debt is attributable to declining tax revenues due to the recession. Examining savings behavior directly, we find limited evidence of Ricardian effects, insufficient to offset the short-term effects of discretionary fiscal policy. J. Japan. Int. Econ., December 2002, 16(4), pp. 536–558. Federal Reserve Bank of New York, New York, and Institute for International Economics, Washington, DC. © 2002 Elsevier Science (USA).Journal of Economic Literature Classification Numbers: E62, E65, E21.