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Dynamic Analysis of Budget Policy Rules in Japan

March 12, 2018
Koichi Futagami*1
Kunihiko Konishi*2

Abstract

We construct an endogenous growth model with public capital and endogenous labor supply and examine quantitatively the welfare effects of fiscal consolidation on the Japanese economy. We consider two modes of fiscal consolidation: the adjustment to a new lower target of the debt-to-GDP and deficit-to-GDP ratios. We find that the debt and deficit reduction rules based only on government consumption and investment expenditure cuts improve households' welfare. This improvement in households' welfare becomes large as the speed of fiscal consolidation rises. Further, reductions in the target debt-to-GDP or deficit-to-GDP ratio generate larger welfare gains. We also discuss the welfare effects of fiscal consolidation with tax increases and transfer payment decreases.

JEL Classification
E62; H54; H60

Keywords
Fiscal consolidation; Endogenous growth; Welfare

We would like to thank Shin-ichi Nishiyama, Kozo Ueda, and the seminar participants at the Seventh Joint Conference organized by the University of Tokyo Center for Advanced Research in Finance and the Bank of Japan Research and Statistics Department and Kobe Conference on Trade, Financial Integration and Economic Growth. Konishi's research is partially supported by the Research Fellowship for Young Scientists of the Japan Society for the Promotion of Science (JSPS) (No.16J09472). Any errors are our responsibility.

  1. *1Graduate School of Economics, Osaka University
    E-mail: futagami@econ.osaka-u.ac.jp
  2. *2Institute of Economic Research, Kyoto University
    E-mail: k.konishi.econ@gmail.com

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