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.     

Financial Frictions and the Fiscal Theory of Price Level Determination

The fiscal theory of the price level represents a significant departure from the quantity theory of money, as it implies that active (non-Ricardian) fiscal policy provides the nominal anchor and determines the price level. In this paper we take a first pass at integrating discussion of financial frictions and the fiscal theory of the price level. We first present empirical evidence in support of non-Ricardian fiscal policy, and then discuss the fiscal theory of the price level in a world with financial frictions. After illustrating how the financial friction influences the price level, we provide a theoretical explanation to our empirical findings. We also argue that the financial friction, which is related to fiscal policy, provides an additional instrument tool to the fiscal authority and an advantage over the monetary authority in choosing the equilibrium.     

Fiscal sustainability in Japan

This paper investigates fiscal sustainability of Japan by providing a dynamic stochastic general equilibrium (DSGE) model that features the low interest rate of the government bond relative to the economic growth rate to mimic the actual data. We evaluate fiscal sustainability by investigating whether the expected path of the debt-to-GDP ratio stabilizes or increases without bound. The debt-to-GDP ratio depends crucially on the projected growth rate and the fiscal policy rule. If the government does not react to the current fiscal crisis, the debt-to-GDP ratio will increase without bound, and then the fiscal policy is not sustainable. If the fiscal rule uses Bohn’s (1998) idea that involves the response of the primary surplus to the debt, sustainability improves. This rule provides a useful and realistic reform plan in the short and long runs.     

Japanese government debt and sustainability of fiscal policy

We construct quarterly series of the revenues, expenditures, and debt outstanding for Japan from 1980 to 2010, and analyze the sustainability of the fiscal policy. We pursue three approaches to examine the sustainability. First, we calculate the minimum tax rate that stabilizes the debt to GDP ratio given the future government expenditures. Using 2010 as the base year, we find that the government revenue to GDP ratio must rise permanently to 40–47% (from the current 33%) to stabilize the debt to GDP ratio. Second, we estimate the response of the primary surplus when the debt to GDP ratio increases. We allow the relationship to fluctuate between two “regimes” using a Markov switching model. In both regimes, the primary surplus to GDP ratio fails to respond positively to debt, which suggests the process is explosive. Finally, we estimate a fiscal policy function and a monetary policy function with Markov switching. We find that the fiscal policy is “active” (the tax revenues do not rise when the debt increases) and the monetary policy is “passive” (the interest rate does not react to the inflation rate sufficiently) in both regimes. These results suggest that the current fiscal situation for the Japanese government is not sustainable.     

财政赤字、经常账户与政府债务研究——李嘉图等价视角的国际经验分析

本文使用42个发达工业化国家和新兴经济体国家2000～2010年的经济数据,采用面板门槛模型估计不同国家财政政策对经常账户的影响,检验李嘉图等价效应成立的条件。估计结果显示,财政政策与经常账户表现出"双赤字"现象,但政府债务规模对消费与投资的扭曲作用使得财政赤字与经常账户又呈现非线性关系。同时,较高的税负水平对财政政策效果的影响是导致李嘉图等价效应成立的重要条件。本文的结论表明,我国长期实施的扩张性财政政策对经常账户平衡的不利影响已经开始显现。因此,实施审慎的宏观财政政策、降低税负水平对维持经常账户平衡和经济健康发展具有重要的战略意义。     

Can inflation targeting regimes be effective in developing countries? The Turkish experience

This paper examines the performance of Turkey's inflation targeting (IT) experience. We find the IT regime to be an effective framework. Our judgment is based on three broad conclusions supported by empirical analyses. First, fiscal stability is an effective tool for a successful monetary policy. Second, the overnight policy of the Central Bank of Turkey rate is a significant determinant of the changes in market lending rates, which is the preliminary step in the monetary transmission mechanism. Third, recent developments on the broader issue of the effectiveness of interest rate policy in controlling inflation through aggregate demand management and through other channels are encouraging. Based on our findings, we argue that the impact of policy rate changes on economic activity and inflation have become more predictable and changed in the direction in line with theory, improving the transmission capacity of monetary policy.     

Current Account and Fiscal Policy in Japan: 1885–1991

This paper explores the empirical relationship between the current account balance and macroeconomic series for the Japanese economy over the years 1885–1991. The long-run equilibrium depends on which series (public debt or budget deficits) affects assets relative to a capital stock rate. Departing from the Ricardian Equivalence structure (no bequest motives), fiscal policy in Japan is shown to be more related to the current account when policy is introduced by shifts in tax revenues rather than by changes in national debt.     

Cooperative fiscal policy at the zero lower bound

This paper investigates the use of fiscal policy in response to a large negative aggregate demand shock which may push the global economy into a liquidity trap. Fiscal policy may be an effective tool to respond to a liquidity trap, but its international spillover effects may operate quite differently from its domestic effects. We derive the optimal cooperative fiscal response to a global liquidity trap in a two country world economy. Surprisingly, we find that the optimal fiscal spending response for a partner country to a negative aggregate demand shock in a source country may be negative. If fiscal policy can be chosen under policy commitment, the optimal response involves current fiscal expansion combined with future fiscal contraction, after the liquidity trap has ended.     

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.     

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.     

Bayesian analysis of time-varying parameter vector autoregressive model for the Japanese economy and monetary policy

This paper analyzes the time-varying parameter vector autoregressive (TVP–VAR) model for the Japanese economy and monetary policy. The parameters are allowed to follow a random walk process and estimated using the Markov chain Monte Carlo method. The empirical result reveals the time-varying structure of the Japanese economy and monetary policy during the period from 1981 to 2008. The marginal likelihoods of the TVP–VAR model and other fixed parameter VAR models are estimated for model comparison. The estimated marginal likelihoods indicate that the TVP–VAR model best fits the Japanese economic data.     

Factor decomposition of sub-provincial fiscal disparities in China

With the help of fiscal statistics on sub-provincial public finances in the second half of the 1990s, this paper explores the hotly debated issues pertaining to fiscal disparities in China during this period, and the various factors driving the changes in fiscal disparities. Among them are economic factors (e.g., GDP per capita, economic structure), and institutional factors (e.g., urban–rural dichotomy, ethnic issues).We adopt Morduch and Sicular's general, regression-based approach to decompose fiscal disparity with respect to per capita fiscal expenditure (Morduch & Sicular, 2002). The empirical results indicate that among all the statistically significant factors, GDP per capita and urban–rural dichotomy are the two most important variables that affects fiscal disparities, with a total contribution of 60%. Other relatively important factors are economic structure and population density. Several features of fiscal expenditure in China identified by our empirical findings together with their corresponding policy implications are discussed.     

Exchange rate movements and foreign direct investment (FDI): Japanese investment in Asia, 1987–2008

The paper estimates the impact of exchange rate movements on foreign direct investment (FDI). By using the panel data of Japanese FDI flows to nine dynamic Asian economies during 1987–2008, the paper finds that (i) FDI declined with a depreciation of the yen against host country currencies; (ii) it increased with exchange rate volatility; and (iii) it was little affected by the Asian financial crisis, especially when disguised financial flows were removed from the data. A novel result concerns the negative response of FDI to the third moment of monthly exchange rate changes: the volume of FDI was smaller when the distribution was positively skewed (i.e., when the yen was biased towards relatively large depreciation shocks). If skewness proxies for expected mean-reverting changes, this supports the idea that source country investors care about the future stream of revenues and returns denominated in their own currency. These results are robust, with other standard control variables having statistically significant coefficients with expected signs.     

International deflation risks under alternative macroeconomic policies

We use a version of the Global Projection Model covering the United States, Euro area and Japan to assess options for dealing with the looming risk of international deflation. The zero floor to interest rates constrains monetary policy. Confidence intervals, derived from stochastic simulations, indicate ranges of uncertainty. The results suggest a high probability of a declining price level for a couple of quarters in 2009. Suitable policy adaptations reduce the risk that this might turn into a prolonged, global deflation. These include: a price level path target for monetary policy, which would respond to previous, as well as expected, shortfalls from the desired inflation rate; a more stimulative fiscal policy; and an increase in the long-run target for inflation.     

Rules,discretion, and international monetary and fiscal policy coordination

This paper considers the implications of international policy coordination when both monetary and fiscal policy choices are endogenous. We show that a movement from insular monetary commitment to international monetary policy coordination will, if fiscal policies are not coordinated, produce higher output and public expenditure levels at the expense of higher inflation rates. We also show that the concurrent coordination of monetary and fiscal policies raises output and inflation while lowering public expenditure relative to a regime of monetary coordination alone. We conclude that the arguments for concurrent monetary and fiscal policy coordination fail to have a clear-cut theoretical basis.     

What causes changes in the effects of fiscal policy? A case study of Japan

In the past two decades, the Japanese government has spent a considerable amount of money to counteract the severe recessions that have recurred since the early 1990s. Numerous studies have pointed out that the effects of these expenditures have diminished since around the 1990s. However, none of these studies has statistically explored the reasons for this diminution, which they implicitly or explicitly mention. The purpose of this study is to statistically investigate these reasons, using a threshold vector autoregression (VAR) in which the causes pointed out in the literature are adopted as the threshold. If the null hypothesis that the estimated parameters are equal under each regime is rejected, we can conclude that a given cause does affect the macroeconomic structure and, in turn, the fiscal policy effects. We then estimate the impulse response functions in both sample periods, as constructed on the basis of threshold estimates, and compare the effects of fiscal policy in each period.The following are the main results of the study. First, we found that the diffusion index of the attitudes of financial institutions toward lending and the yearly change in the annual average of the quarterly ratios of the structural primary budget balance to potential GDP significantly reject the null hypothesis; therefore, we concluded that these variables have a definite impact on fiscal expansion effects. Second, the resulting impulse response functions show that the effects are traditional, although there are some notable differences. In particular, when banks’ attitude toward lending is tight and the financial condition of the government is bad, the demand-enhancing effects of government expenditure should be considered weak. In this regard, the traditional accelerator effects of private investment, the existence of liquidity-constrained households, and non-Keynesian effects are key operative concepts.     

Monetary vs. fiscal policy: Some evidence from vector autoregression for India

This paper investigates the relative importance of monetary and fiscal policy for India. Unlike previous studies, a more general approach of multivariate vector autoregression has been employed. Analysis of the causality results based on the joint F-tests and the dynamic multipliers based on the variance decompositions and the impulse response functions unambiguously support the Keynesian stance on the importance of fiscal policy. There is very little evidence of exogeneity of money supply, undermining the validity of the monetarist proposition. On the contrary, Indian monetary policy appears to have accommodated changes in government expenditure, prices and output, lending support to the structuralist-Mundellian views.     

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.     

The need for economic policy coordination between Europe,Japan, and the United States: Policy recommendations for the 1990s

Better policy coordination between Europe, Japan, and the United States is urgently needed in order to restore economic growth and to diminish mutual trade imbalances. Using the EC Compact model it is shown how coordinated fiscal policies can contribute to reaching these goals in the 1990s. For Europe, the most plausible fiscal policy option seems to be a combination of lower direct taxes, public spending cuts, and wage moderation; for Japan a more expansionary fiscal policy is feasible. For the United States, however, public spending cuts or tax increases are necessary conditions for better economic performance. In addition, for all three blocks a swap between tax reduction and wage moderation is recommended.     

Anchor me: the benefits and challenges of fiscal responsibility

This paper discusses the benefits and challenges of implementing a rule‐based fiscal responsibility framework, using the Philippines as a case study. It estimates structural measures of the fiscal stance over the period 1980–2016 and applies a stochastic simulation model to determine the optimal set of fiscal rules. The empirical analysis indicates that discretionary fiscal policy has been procyclical, and the degree of procyclicality has increased in recent years. While the national government's nonbinding ceiling on the overall budget deficit is helpful, it does not constitute an appropriate operational target to guide fiscal policy over the economic cycle and necessarily ensure that the fiscal stance meets the government's intertemporal budget constraint. To this end, I use stochastic simulations and show the macroeconomic benefits of a well‐designed fiscal responsibility law that enshrines explicit fiscal rules designed for countercyclical policy and long‐term debt sustainability and an independent fiscal council that improves accountability and transparency.