FISCAL SUSTAINABILITY OF JAPAN: A DYNAMIC STOCHASTIC GENERAL EQUILIBRIUM APPROACH |
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| Authors: | MASAYA SAKURAGAWA KAORU HOSONO |
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| Institution: | 1. Keio University;2. We thank two anonymous referees, Yasushi Iwamoto, Toshihiro Ihori, Takatoshi Ito, Akira Okamoto, Masao Ogaki, Etsuro Shioji, Makoto Saito, Toru Nakazato, Tomoaki Yamada, Tsutomu Watanabe and seminar participants at the 9th Macroeconomics Conference, Hitotsubashi University, Fiscal Studies Group at the Institute of Statistical Research for their valuable comments. Sakuragawa thanks Kikawada Foundation for financial support. Remaining errors are ours.;3. Gakushuin University |
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| Abstract: | The purpose of this paper is to investigate the fiscal sustainability of Japan by applying a dynamic stochastic general equilibrium model to the Japanese economy. By introducing intermediation costs into the model, we succeed in explaining the observed relationship between the interest and GDP growth rates, which is crucial in testing for sustainability. When the projected real growth rate is 2.5%, the average real interest rate becomes 2.57%, and the debt‐to‐GDP ratio gradually increases stochastically so that government debt is not sustainable. To recover sustainability, the primary surplus must be 0.2% of GDP. |
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| Keywords: | H68 G12 E62 |
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