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Macroeconomic Volatility Under High Accumulation Of Government Debt: Lessons From Japan

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  • PAUL D. McNELIS

    (Department of Finance, Graduate School of Business Administration, Fordham University, New York, 10019, USA)

  • NAOYUKI YOSHINO

    (Department of Economics, Keio University, Tokyo, Japan)

Abstract

This paper applies Bayesian estimation to an open-economy Dynamic Stochastic General Equilibrium (DSGE) model of Japan, to assess the effects of expanding government debt on interest rates, real exchange rate dynamics, and real sector performance. We find that the emergence of even a small risk premium on government debt will trigger considerable instability in the real and nominal variables. We show that a switch to an exchange-rate rule for monetary policy would considerably moderate the instability induced by a rising risk premium.

Suggested Citation

  • PAUL D. McNELIS & NAOYUKI YOSHINO, 2012. "Macroeconomic Volatility Under High Accumulation Of Government Debt: Lessons From Japan," Advances in Complex Systems (ACS), World Scientific Publishing Co. Pte. Ltd., vol. 15(supp0), pages 1-29.
    • Handle: RePEc:wsi:acsxxx:v:15:y:2012:i:supp0:n:s0219525912500579
    DOI: 10.1142/S0219525912500579
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    1. N/A, 1999. "The world economy," National Institute Economic Review, National Institute of Economic and Social Research, vol. 168(1), pages 3-3, April.
    2. N/A, 1999. "The world economy," National Institute Economic Review, National Institute of Economic and Social Research, vol. 169(1), pages 3-3, July.
    3. N/A, 1999. "The world economy," National Institute Economic Review, National Institute of Economic and Social Research, vol. 167(1), pages 3-3, January.
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    5. Naoyuki Yoshino & Tetsuro Mizoguchi, 2010. "The Role of Public Works in the Political Business Cycle and the Instability of the Budget Deficits in Japan," Asian Economic Papers, MIT Press, vol. 9(1), pages 94-112, Winter/Sp.
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    Cited by:

    1. Yoshino, Naoyuki & Taghizadeh-Hesary, Farhad & Mizoguchi, Tetsuro, 2018. "Fiscal Policy Conditions for Government Budget Stability and Economic Recovery: Comparative Analysis of Japan and Greece," ADBI Working Papers 851, Asian Development Bank Institute.
    2. Iwata, Yasuharu, 2013. "Two fiscal policy puzzles revisited: New evidence and an explanation," Journal of International Money and Finance, Elsevier, vol. 33(C), pages 188-207.
    3. Naoyuki Yoshino & Tetsuro Mizoguchi & Farhad Taghizadeh-Hesary, 2017. "Optimal Fiscal Policy Rule for Achieving Fiscal Sustainability: A Japanese Case Study," ADB Institute Series on Development Economics, in: Naoyuki Yoshino & Farhad Taghizadeh-Hesary (ed.), Japan’s Lost Decade, chapter 0, pages 59-75, Springer.
    4. Naoyuki Yoshino & Tetsuro Mizoguchi, 2013. "Change in the Flow of Funds and the Fiscal Rules Needed for Fiscal Stabilization," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 9(1), pages 51-70, January.

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