The Role of Fiscal Policy in Japan: A Quantitative Study,

Abstract

We analyze the role of fiscal policy in the recent showdown in Japan. A dynamic general equilibrium model is developed in which fiscal policy can have both expansionary effects (through increasing returns) and contarctionary effects ( through the increase of public debt and debt and tax burden. A version of the model is calibrated to Japanese and is used to measure the importance of both these effects. We find that under wide range of parameters net expansionary effects quantitatively small thus suggesting a limited role for fiscal stabilization.