Table of Contents

Vol. 145 :Effectiveness of Fiscal and Monetary Policies under Population Aging


Summary of Articles

Fresh Reflections on Domar's Theorem as a Condition for Stabilizing Fiscal Deficit

Author
By YOSHINO Naoyuki(Professor Emeritus, Keio University / Adjunct Professor, National Graduate Institute for Policy Studies)
By MIYAMOTO Hiroaki(Professor, Faculty of Economics and Business Administration, Tokyo Metropolitan University / Visiting Professor, Kochi University of Technology)
(Abstract)

As a result of an increase in social security cost due to the aging of population and fiscal pump-priming intended to counter the effects of the novel coronavirus pandemic, Japan has been forced to issue a vast amount of government bonds, a situation that is raising concerns over the sustainability of the government’s debts.

As a criterion to examine a country's fiscal stability, Domar's condition is frequently used. Domar's condition stipulates that if a country's nominal interest rate is higher than its nominal economic growth rate, the country's fiscal position becomes unstable, resulting in a continuous increase in the balance of government bonds. Recently, based on Domar's condition, the view has been expressed that if the interest rate is kept lower than the economic growth rate through interest rate reduction by the central bank, for example, fiscal instability can be avoided, including in Japan.

This paper explains that as Domar's condition focuses only on supply of government bonds, it does not take into consideration demand for the bonds. Next, it incorporates demand for government bonds into modeling and develops a model in which the government bond yield and the amount of government bond absorption are determined by the supply-demand balance of government bonds and works out a substitute for Domar's condition as a condition for fiscal stability. This substitute condition takes the form of a conditional expression that compares the balance of government bonds with the interest rate elasticity of demand for government bonds. The paper also verifies the validity of the condition based on data concerning Greece, which already experienced fiscal collapse in the past, and Japan, which has until now avoided it but whose balance of government debts is huge. According to the condition for fiscal stability proposed in this paper, while Greece's situation was ripe for fiscal collapse, Japan's situation is not.

The conclusion of the paper is that when we discuss Japan's fiscal stability in the future, it is necessary to pay attention to both the supply and demand of government bonds and compare the balance of government bonds and the interest rate elasticity of demand for government bonds, instead of using Domar's condition, which compares the interest rate and the economic growth rate.


Keywords: Domar's condition, condition for fiscal stability, the balance of supply and demand in the government bond market

JEL Classification: E62, E63, E65

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Local Fiscal Multiplier and Aging of Society

Author
By BESSHO Shun-ichiro(Associate Professor, Faculty of Economics, the University of Tokyo)
(Abstract)

There has been an accumulation of research on estimation of the local fiscal multiplier based on regional panel data using regional and time-series variations in fiscal policy for identification. Following the literature, this paper estimates the local fiscal multiplier in Japan using the Bartik-type instrumental variable approach and examines the variance in the multipliers according to the population aging rate. The results are as follows. First, while the fiscal multiplier regarding total output a year later is nearly 1, statistically significant effects on the employment rate cannot be detected. Second, the cumulative multiplier increases over time until the fourth year. Third, the local fiscal multiplier is higher in regions where the population is relatively young than in relatively old regions. Fourth, while the multiplier regarding government investment is higher than 1, that regarding government consumption is statistically not different from zero. These results may suggest that in regions where the proportion of the working age population is low and the proportion of elderly people, whose marginal consumption propensity is lower than that of younger people, is high, there is less room for income and labor supply to increase in response to fiscal expenditure.


Keywords: local fiscal multiplier, aging of society, Bartik instrumental variable approach

JEL Classification: H30, E62, R50

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An Effect of Population Aging on the Effectiveness of Fiscal Policy
―Analysis Using a Panel VAR Model―

Author
By MORITA Hiroshi(Associate Professor, Faculty of Economics, Hosei University)
By NIWA Hidekazu(PhD student, Graduate School of Economics, Hitotsubashi University)
(Abstract)

We examine how population aging changes the macroeconomic effects of fiscal policy using prefectural-level panel data in Japan. We select two groups from prefectures that are ranked in terms of the rates of population aging, and then estimate a panel VAR (vector autoregression) model for each group. In order to identify a structural shock to government spending and analyze its effects on macroeconomy, we use sign restrictions, which are set consistently with computed impulse responses in a dynamic stochastic general equilibrium model. A key feature of this theoretical model is that it takes into consideration the presence of retirees in order to capture changes in demographics due to population aging. The estimation results indicate that aging leads to a decline in the effectiveness of spending. Moreover, we find that a way employee compensation also varies with aging. This implies that some effects of aging on labor market may have contributed to the decline in the effectiveness of spending.


Keywords: population aging, fiscal multiplier, dynamic general equilibrium model, panel VAR model

JEL Classification: C32, C33, E62

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Effectiveness of Fiscal Policy in Aging Economies

Author
By MIYAMOTO Hiroaki(Professor, Faculty of Economics and Business Administration, Tokyo Metropolitan University / Visiting Professor, Kochi University of Technology)
By YOSHINO Naoyuki(Professor Emeritus, Keio University /Adjunct Professor, National Graduate Institute for Policy Studies)
(Abstract)

This paper examines how population aging affects the effects of fiscal stimulus. We estimate the fiscal multipliers for both aging and non-aging economies by using the panel data of OECD countries. We find that population aging weakens the output-boosting effects of fiscal policy. That is because in aging economies, the response of private consumption and employment to fiscal stimulus weakens, resulting in a decline in the fiscal multiplier. Our analysis suggests that in aging economies, to sustain domestic demand, other economic policies and structural reforms need to play a more important role.


Keywords: population aging, fiscal policy, fiscal multiplier

JEL Classification: E62, H30, J10

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Long-Term Effects of Fiscal Policy Generated through Changes in Productivity

Author
By NAKAHIGASHI Masaki(Associate Professor, Faculty of Economic Sciences, Niigata University / Senior Research Fellow, Policy Research Institute)
(Abstract)

With the low birth rate and aging population, the scale of public investments has shrunk in Japan since the beginning of the 2000s because infrastructure development has almost been completed. In this situation, the aging of infrastructure has emerged as a problem. In order to study the future needs for infrastructure in Japan, this paper conducts an industry-by-industry analysis of the economic effects of public investments —particularly those may occur on private investment through changes in the productivity of capital —based on a long-term stock equilibrium approach. The results make clear that at least in private service industry, an increase in public capital stock has consistently increased the productivity of private capital and has the effect of increasing the optimal level of private capital stock. In order to ensure that the productivity of the private sector in Japan will be sustained in the future, it is essential, at least, to maintain public capital stock.


Keywords: public investment, public capital stock, private investment, private capital stock

JEL Classification: C23, C26, D22, H54

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