What is fiscal sustainability? ―Transversality condition, Domar condition, the fiscal theory of the price level― ( EGUCHI Masataka, HATANO Toshiya)
|By EGUCHI Masataka
|(Associate Professor, Faculty of Economics, Komazawa University)
|By HATANO Toshiya
|(Professor, School of Commerce, Meiji University)
This paper reviews previous studies on fiscal sustainability and conducts a pilot empirical analysis for Japan. In Section I, we summarize the definition of fiscal sustainability and argument over sovereign defaults. Section II outlines the transversality condition as a typical formulation of fiscal sustainability. Section III introduces money and examine the transversality condition of nominal values. In this setting, the fiscal theory of the price level (FTPL), which asserts that the transversality condition is satisfied by price fluctuations, becomes valid. Section IV discusses three issues, taking into account the comparison of interest rates and economic growth rates (i.e., the Domar condition). First, based on the Domar condition, we discuss the equivalence/non-equivalence between the transversality condition and the convergence of the government debt-to-GDP ratio. Second, we consider the Domar condition from the perspective of dynamic efficiency and its implications for fiscal sustainability. In particular, we suggest that in the case where g>r, a rational bubble can arise in government debt and that convergence of the government debt-to-GDP ratio below a certain value (rather than the transversality condition) is an appropriate sustainability indicator. Third, we conduct an empirical analysis (stochastic debt sustainability analysis: SDSA) when there is uncertainty in r-g. According to our calculations, when there is uncertainty in r-g, even if the current situation is g>r, Japan’s government debt-to-GDP ratio could be very large in 2030.
Keywords: fiscal sustainability, transversality condition, fiscal theory of the price level (FTPL), seigniorage, Domar condition, rational bubble, stochastic debt sustainability analysis (SDSA)
JEL Classification: E62, H63, E31
|By NOMURA Akiko
|(Managing Director, Nomura Institute of Capital Markets Research)
As Japan faces the growing problem of an aging population combined with declining birth rates, public pensions are required to curtail benefits through the “macroeconomic slide” mechanism. Alongside the growing role of private pensions, the sustainability of private pensions itself becomes more important. Defined contribution pension (DC), which is a type of private pension, has steadily gained popularity since its introduction in 2001, but faces fundamental problems that need to be addressed and improved. Firstly, there is a need to conduct a comprehensive review of the DC contribution limits so that individuals can enjoy equal contribution opportunities regardless of factors such as their working styles or the pension systems at their workplaces. From the tax theory and fiscal perspectives, the transition to an EET (Exempt-Exempt-Taxable) tax system for private pensions is also an important point for discussion. Moreover, in view that it is important for many individuals to enroll in DC and utilize it effectively, there is also room for the consideration of bold measures such as automatic enrollment arrangement aimed at further promotion and expansion. As DC systems are managed and administered by private corporations, it should be noted that they must be sustainable as a business.
Keywords: defined contribution pension, private pension, pension tax system, sustainability of pension system, adequacy of pension systems, defined contribution pension plan administrator
JEL Classification: H24, J26, J32, K34
|By JINNAI Ryo
|(Associate Professor, Institute of Economic Research, Hitotsubashi University)
This paper discusses the latest research trends on the asset price bubble from the perspective of why policymakers and researchers have differing opinions on the subject. It explains there are differing views surrounding terminology, as well as different viewpoints of the bubble to begin with. It also discusses a famous policy controversy, as well as recurrent-bubble model that the author developed in his recent research. This paper also discusses its policy implications and empirical research.
Keywords: price asset bubble, rationality, economic policy
JEL Classification: E20, E30, E44, E60, O40
|By HOSOYA Kei
|(Professor, Faculty of Economics, Kokugakuin University)
This paper makes a distinction between the analytical viewpoints of sustainable growth and sustainable development, which are derived from the concept of sustainability, and conducts a detailed review of the two major research papers that have represent the milestones of research on environmental macroeconomics in recent years. Here, the analysis focuses on the point that the research itself introduces an endogenously determined time preference function with a relatively long history, into the dynamic framework of environmental macroeconomics. Research on macroeconomic dynamics has pointed out the importance of so-called “deep parameters.” The rate of time preference is one of such parameters, and we can say that it has also continued to influence macro-theoretical research in environmental economics. The first model examines the impact of environmental taxes under endogenous time preference, in the context of sustainable growth being achieved. Next, the second model derives the dynamic features of the model when complex endogenous time preferences are considered, based on definitions that are rooted in the concept of sustainable development as the constancy of utility over time.
Keywords: endogenous time preference, sustainable growth, environmental tax (Pigouvian tax), sustainable development, Hartwick Rule, Hotelling Rule
JEL Classification: H23, I31, O44, Q32, Q56