Title: Optimal fiscal policy rule for achieving fiscal sustainability: the Japanese case

Authors: Naoyuki Yoshino; Tetsuro Mizoguchi; Farhad Taghizadeh-Hesary

Addresses: Asian Development Bank Institute, Keio University, Tokyo, Japan ' Faculty of Economics, Takasaki City University of Economics, Gunma, Japan ' Keio University, Tokyo, Japan; Ministry of Economic Affairs and Finance, Iran

Abstract: Japan's debt-to-GDP ratio is the highest among OECD countries. While the Domar condition and Bohn's conditions are often used in the literature to check whether a government's debt situation is in a dangerous zone, this paper shows that the Domar condition is obtained only from the supply of government bonds without consideration of the demand side. In addition, Bohn's condition satisfies the stability of the government budget in the long run and even if the condition is satisfied, the recovery of the economy may not be achieved. This paper proposes a new condition considering both the demand and supply of the bond market that satisfies both the stability of the government budget and the recovery of the economy. The empirical findings show that to achieve fiscal sustainability, both sides of the Japanese Government budget (expenditure and revenue) need to be adjusted simultaneously and the decrease in government expenditure has to be more than the increase in tax revenue.

Keywords: Japanese bond market; fiscal sustainability; fiscal policy rule; government debt management.

DOI: 10.1504/GBER.2019.098082

Global Business and Economics Review, 2019 Vol.21 No.2, pp.156 - 173

Received: 22 May 2017
Accepted: 25 Aug 2017

Published online: 18 Dec 2018 *

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