Fiscal Policy Effectiveness in Japan

34 Pages Posted: 6 Jun 2002

See all articles by Kenneth N. Kuttner

Kenneth N. Kuttner

National Bureau of Economic Research (NBER); Williams College

Adam S. Posen

Peterson Institute for International Economics

Date Written: August 27, 2002

Abstract

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.

Keywords: Japan, fiscal policy, public spending, saver, saving, capital, interest rates, taxes

JEL Classification: E62, E65, E21

Suggested Citation

Kuttner, Kenneth N. and Kuttner, Kenneth N. and Posen, Adam S., Fiscal Policy Effectiveness in Japan (August 27, 2002). Available at SSRN: https://ssrn.com/abstract=310106 or http://dx.doi.org/10.2139/ssrn.310106

Kenneth N. Kuttner

National Bureau of Economic Research (NBER)

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Adam S. Posen (Contact Author)

Peterson Institute for International Economics ( email )

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