Fiscal Sustainability of Japan: A Dynamic Stochastic General Equilibrium Approach

Abstract

The purpose of this paper is to investigate the fiscal sustainability of Japan by applying a dynamic stochastic general equilibrium model to the Japanese economy. By introducing intermediation costs into the model, we succeed in explaining the observed relationship between the interest and GDP growth rates, which is crucial in testing for sustainability. When the projected real growth rate is 2.5%, the average real interest rate becomes 2.57%, and the debt-to‐GDP ratio gradually increases stochastically so that government debt is not sustainable. To recover sustainability, the primary surplus must be 0.2% of GDP.H68 , G12 , E62 ,

Fiscal sustainability in Japan

“…Implications of their small-open-economy model, in which the interest rate is exogenous, differ from those of the closed economy that will explain well the debt problem of a large economy like Japan. Sakuragawa and Hosono (2010) develop a model that endogenizes the interest rate but their model is silent on implications on sustainability through the route of endogenous growth rate.…”

Achieving Fiscal Balance in Japan*

“…Sakuragawa and Hosono () discuss fiscal sustainability of Japan from the relationship between the interest rate and GDP growth rate.…”

Fiscal limits and sovereign default risk in Japan

“…The discount factor b is set be 0.98 because the real 10 years government bond yield was 2.1% on average from 1990 to 2013. This discount factor is the same level as that of previous researches about the Japanese economy such as Fujiwara et al (2005), Sakuragawa and Hosono (2010) and Sakuragawa and Hosono (2011). Following Bi (2012), leisure L is calibrated to 0.75 and labor supply N is 0.25 because they assume that the household spends one-forth of its time on labor.…”