Japanese fiscal reform: fiscal reconstruction and fiscal policy

This paper evaluates the recent movement of Japanese fiscal reform. We first summarize fiscal policy in 1990s. Then, we investigate several relevant topics of fiscal policy such as the macroeconomic impact of government debt and the sustainability problem. We then consider dynamic properties of fiscal reconstruction process by analyzing the dynamic game among various interest groups. This paper points out that the long-run structural reform is more important than the short-run Keynesian policy in Japan.     

Sustainability of the fiscal imbalance and public debt under fiscal policy asymmetries in Sri Lanka

This paper investigates the sustainability of Sri Lanka’s fiscal imbalance and public debt. To test for sustainability of the fiscal imbalance, the study applies a symmetric ARDL (autoregressive distributive lag) technique to estimate a government intertemporal budget constraint. And to test for sustainability of public debt, it applies an asymmetric ARDL technique to estimate a fiscal reaction function, which allows for differential responses in the primary budget balance depending on whether shocks to regressors are positive or negative. Annual data for the period 1961–2018 are used in the estimations. The results indicate that Sri Lanka’s fiscal management is inconsistent with strong form sustainability, which requires that expenditures not grow faster than revenues. However, estimation of the fiscal reaction function finds robust evidence for fiscal policy asymmetries. Evidence emerges that Sri Lanka’s fiscal policy stance is procyclical with strong stabilization tendencies in economic expansions that are not sustained in contractions. Against upsurges in the debt-to-GDP ratio, authorities are found to pursue fiscal consolidation, thus suggesting weak form sustainability.     

Stock price targeting and fiscal deficit in Japan: Why did the fiscal deficit increase during Japan’s lost decades?

The purpose of this paper is to explain why Japan’s fiscal deficit increased so dramatically in the 1990s and the 2000s. We focus on the role of “stock price targeting” to explain why the fiscal expenditure increased so much. After presenting a simple model to describe government behavior with an optimistic view about stock price and output growth, the paper tests whether the model can explain Japan’s fiscal expenditure. The empirical results, using biannual and high-frequency data of the 1990s and the 2000s, show that the stock price targeting can track Japan’s fiscal expenditure reasonably well, especially in the 1990s. They imply that without the stock price targeting, the total amount of biannual fiscal stimulus from 1992 to 2000 would have been lower by 2.5 trillion yen on average.     

Stable and enforceable: a new fiscal framework for the Euro area

Since the great financial crash, the need for new fiscal rules to prevent unsustainable fiscal policies is universally recognised. In practice such rules, including those in the Stability and Growth Pact, have proved to be impossible to enforce. Thus, to avoid unsustainable fiscal policies reappearing, and to prevent monetary policy from being undermined by undisciplined governments, there is a need for a framework capable of imposing fiscal discipline. This paper considers an intertemporal assignment, where fiscal policy focuses on long-term objectives and monetary policy on short-term stabilisation. We argue for public sector debt targets as a practical way to achieve such a set up, and an excess debt protocol is constructed to give enforceable form to those targets. The ideas of “fiscal space” and optimal debt levels are used to provide a mechanism for identifying a stable region within which the debt targeting regime should operate. Making these factors explicit would both improve the credibility of planned fiscal policies and reduce risk premia on borrowing costs. We finally show how Europe’s competitiveness pact, and debt restructuring operations, can be used to maximise the available fiscal space.     

Solvency and sustainability of fiscal policies in the EU

Summary This paper focuses on the sustainability and solvency issues of the public sector. Tests for sustainability heavily rely on the time-series properties of the debt-to-GDP ratio, whereas solvency test focus on the deficit inclusive of interest payments. Sustainability and solvency tests are applied first on 8 ERM countries during the period 1970–1994. Subsequently, we concentrate on historical evidence (from 1870 onwards) for the Belgian central government. This long-term view allows for a more accurate time-series analysis. On the one hand, we find historical support for the hypothesis that high and persistent deficits for some periods can be consistent with the present-value budget constraint (solvency), provided that policies are changed eventually. On the other hand, the much stronger requirement of sustainability is not fulfilled since we do not find a tendency of the debt ratio to return to a constant long-run equilibrium level.Previous versions of this paper were written while F. Vanhorebeek was a research assistant at the Department of Economics, Catholic University of Leuven. We are grateful to W. Asma; G. de Bruyne, N. Demeester and two anonymous referees for their comments regarding the paper's methodology. We have also benefited from useful conversations with E. Buyst and P. Clement on the subject of this paper, as well as from their help in obtaining historical data. Remaining errors are ours. The opinions expressed here are solely those of the authors and should not be attributed to any other person affiliated with the Planning Bureau or the University.     

Population aging in Japan: demographic shock and fiscal sustainability

The paper develops a general equilibrium framework to examine the economic implications of population aging in Japan. Particular attention is paid to aggregate saving behavior, which is modeled on the basis of empirical age-earnings profiles using a life-cycle approach. The paper estimates the output loss caused by demographic changes and assesses the impact of aging on Japan’s government finances. Key fiscal policy options to address the consequences of aging are also compared with respect to their effects on growth and welfare.     

Consumption,income distribution and taxation: Keynes' fiscal policy

The General Theory argued that income distribution affected consumption. Greater income equality put more money into the hands of people with higher MPCs, leading to increased consumption; and greater inequality had the reverse impact. Yet, of the six objective factors that Keynes identified as affecting consumption, only distribution has failed to become part of mainstream consumption theory. This paper examines the reasons why this is so, and then develops a model incorporating the after-tax distribution into a Keynesian consumption function. Empirical tests of this model find that after-tax income distribution is a significant determinant of consumption.     

Absence of safe assets and fiscal crisis

This paper develops a fiscal crisis model that explains a mechanism under which low interest rates can coexist with Japan's large outstanding debt. The key idea is that when there is a strong home bias in the asset portfolio of domestic bondholders, these investors turn out to have no access to any assets that hedge fiscal risk. This explains why domestic investors do not request a risk premium on government bonds. In this environment, the interest rate and the default probability are low, and the government can sustain its large debt even under adverse fiscal conditions. As the interest rate does not rise fully to reflect the risk premium, the low interest rate is not always a signal of sound fiscal conditions. The welfare implications of financial market reform are mixed. This reform can improve welfare so long as the government can sustain the debt, but at the same time, it makes it difficult to sustain the debt because the interest rate rises. Quantitative easing is effective in lowering the risk premium.     

Growth and employment effects of fiscal regimes

This paper presents an endogenous growth model with firms exhibitingexternal or internal increasing returns. Firms are either perfectlyor monopolistically competitive. The paper extends fiscal policyresults, to cases where innovations are intentionally generatedby firms. To provide quantitative information, the model iscalibrated to replicate EU7 aggregate data. The theoreticalresults indicate that distortionary taxes have strong negativeeffects on growth and employment and they tend to increase withthe degree of private returns. However, the quantitative resultsturn out to be fairly robust with respect to alternative assumptionson the degree of internal increasing returns made in the processof calibrating the model.     

Over-optimistic official forecasts and fiscal rules in the eurozone

Eurozone members are supposedly constrained by the fiscal caps of the Stability and Growth Pact. Yet ever since the birth of the euro, members have postponed painful adjustment. Wishful thinking has played an important role in this failure. We find that governments’ forecasts are biased in the optimistic direction, especially during booms. Eurozone governments are especially over-optimistic when the budget deficit is over the 3 % of GDP ceiling at the time the forecasts are made. Those exceeding this cap systematically but falsely forecast a rapid future improvement. The new fiscal compact among the euro countries is supposed to make budget rules more binding by putting them into laws and constitutions at the national level. But biased forecasts can defeat budget rules. What is the record in Europe with national rules? The bias is less among eurozone countries that have adopted certain rules at the national level, particularly creating an independent fiscal institution that provides independent forecasts.     

Military spending,fiscal capacity and the democracy puzzle

This article elucidates the complex and occasionally counter-intuitive effects of the twin phenomena of democratization and modernization on the path of military spending between 1880 and 1938 by analyzing the relationship between various traits of democracy and the state's fiscal capacity. The conclusion, in the spirit of Kant, is that it is political participation which is most effective in reducing military spending. Other elements of democracy play a distant secondary role. In addition, fiscal capacity, which often emerges and increases in tandem with democratization, is identified as one of the major determinants of defense outlays, although its impact decreased between the two World Wars.     

Learning the fiscal theory of the price level: Some consequences of debt-management policy

This paper examines the consequences of the scale and composition of the public debt in policy regimes in which monetary policy is ‘passive’ and fiscal policy ‘active’. This configuration of policy is argued to be of both historical and contemporary interest, in economies such as the US and Japan. It is shown that higher average levels and moderate average maturities of debt can induce macroeconomic instability for a range of policies specified as simple rules. However, interest-rate pegs combined with active fiscal policies almost always ensure macroeconomic stability. This suggests that in periods where the zero lower bound on nominal interest rates is a relevant constraint on policy design, a switch in fiscal regime is desirable.     

战后日本的积极财政政策及其启示

战后日本积极的财政政策是长期性的、战略性的，我们从中可以汲取的经验有：增加投资要与技术进步相结合，要突出重点；在审慎使用金融工具的同时，加大使用财政工具的力度；另外，结合我国的实际，在积极培育大型企业集团的同时，应该充分重视小企业的发展。     

Foreign aid and fiscal response: Does aid disaggregation matter?

Foreign Aid and Fiscal Response: Does Aid Disaggregation Matter? —The present paper constitutes a new approach in the aid-effectiveness literature in two important respects. Firstly, it develops and then tests a model of foreign aid and fiscal response, which, for the first time in the aid-effectiveness literature, embraces the aiddisaggregation issue; we do this by disaggregating aid flows into three main components, namely programme aid, project aid and technical assistance, and by subsequently estimating our model for two countries, India and Kenya. Secondly, on the modelling front, we improve on earlier work in this area by using an appropriate specification for the recipient-country government’s welfare function, with significant positive implications for the empirical findings obtained. This new approach adopted in the paper and the empirical results obtained may have important implications for a better understanding of the fiscal impact of aid in aid-recipient countries.     

Co-ordinating fiscal authorities in the euro-zone: a key role for the ECB

This paper examines the conditions for fiscal restraint to emergeas Nash equilibrium in the game between fiscal authorities ina monetary union and discusses the implications for the ECB'smonetary strategy. We show that fiscal authorities fail to internalizethe adverse area-wide effects of their policies when the ECBtargets union-wide aggregates. To address this co-ordinationfailure, we propose that the ECB reacts to fiscal restraintby implementing a monetary reward. Applying the pareto- andrisk dominance criteria to the ensuing co-ordination game, weshow that the ECB can ensure convergence upon fiscal restraintby adopting a weakly countercyclical reaction function.     

技术创新是企业家的社会责任

技术创新把技术作为一个新的经济函数,引入到社会经济增长中,因此,它主要是一个经济发展的范畴。技术创新着眼新技术的运用,特别强调科学技术物化为生产力的问题。企业家如果能够认识到技术创新是自己的社会责任,那么他们在企业中倡导技术创新的自觉性就一定会大大的提高。