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The Effects of Fiscal and Monetary Policies in Japan: What Combination of Policies Should Be Used?

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  • Kansho Piotr Otsubo

    (Graduate School of Economics, Meiji Gakuin University, 1-2-37 Shirokanedai, Minato-ku, Tokyo 108-8636, Japan)

Abstract

In this paper, we compare and analyze the differences in the effects of fiscal and monetary policy using time-varying parameter structural vector auto-regression (TVP-VAR). Specifically, we estimate a 5-variable TVP-VAR model using monthly data from March 2001 to August 2017. The estimation results indicated the following four points. First, expansionary fiscal policy can impact GDP faster than an expansionary monetary policy. Second, expansionary fiscal policy has lowered prices. Third, an expansionary monetary policy can increase GDP more persistently than an expansionary fiscal policy during unconventional monetary policy periods. Finally, expansionary monetary policy has raised prices. These estimation results reveal that if the Japanese government wants to strongly boost GDP alone, it should use fiscal policy alongside monetary policy because fiscal policy can immediately raise GDP. If the Japanese government seeks moderate increases in both GDP and prices, it is more effective to use monetary policy alone without increasing fiscal expenditure.

Suggested Citation

  • Kansho Piotr Otsubo, 2018. "The Effects of Fiscal and Monetary Policies in Japan: What Combination of Policies Should Be Used?," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 9(01n02), pages 1-25, February.
    • Handle: RePEc:wsi:jicepx:v:09:y:2018:i:01n02:n:s1793993318500047
    DOI: 10.1142/S1793993318500047
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