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Jun-hyung Ko and Hiroshi Morita
 
''Fiscal Policy under the Debt Feedback Rule: The Case of Japan''
( 2011, Vol. 31 No.3 )
 
 
The Japanese government has amassed a huge amount of gross public debts over the past several decades. However, previous empirical works dealing with vector auto-regression (VAR) have not considered the effect of debt on fiscal policy and the macro economy. In this paper, we incorporate debt dynamics in a VAR model in the spirit of Favero and Giavazzi (2007, 2011). The inclusion of the debt feedback rule in VAR can help overcome the misspecification problem and provide direction toward a more relevant debt path and fiscal stance. The main findings of our study are as follows. First, in the pre-bubble period, the fiscal authority in Japan increased the primary surplus when the public debt level was high. However, this Ricardian behavior was not seen in the post-bubble period. Second, the impulse response functions to the expansionary government spending shock reveal that the stance of fiscal policy was more active in the pre-bubble. Third, while the forecast of debt dynamics in the pre-bubble period was stable, it became explosive in the post-bubble period.
 
 
Keywords: fiscal policy, Japan's public debt, VAR
JEL: H3 - Fiscal Policies and Behavior of Economic Agents: General
E3 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data)
 
Manuscript Received : Apr 26 2011 Manuscript Accepted : Aug 23 2011

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