Fiscal Remedies for Japan's Slump

Edited by Laurence Ball

in Monetary Policy with Very Low Inflation in the Pacific Rim

Published by University of Chicago Press

Published in print October 2006 | ISBN: 9780226378978
Published online February 2013 | e-ISBN: 9780226379012 | DOI:
Fiscal Remedies for Japan's Slump

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This chapter describes the interaction between monetary and fiscal policy for Japan. It looks for policies that end Japan's slump without worsening its debt problem. The debt-income ratio initially rises, because the output slump develops primary deficits. Monetization has no effect on output or inflation, and no long-run effect on debt. However, it prevents the jump in the debt-income ratio that occurs in year one if transfers are debt financed. A quick output recovery requires transfers totaling 9.4 percent of potential gross domestic product (GDP) over four years. After the recovery, the Taylor rule guides the economy to a steady state with output at potential and 2 percent inflation. The transfers end the output slump and decrease Japan's long-run fiscal problem. Furthermore, money finance is preferable if policymakers care about short-run as well as long-run debt levels.

Keywords: monetary policy; fiscal policy; Japan; slump; debt; monetization; gross domestic product; Taylor rule; inflation; money finance

Chapter.  9329 words.  Illustrated.

Subjects: Business and Management

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