The role of fiscal policy in Japan: a quantitative study

This paper analyzes the role of fiscal policy in the recent slowdown in Jap an. A dynamic general equilibrium model is developed in which fiscal policy can have both expansionary effects (through increasing returns) and contra ctionary effects (through the increase of public debt and tax burden). A ve rsion of the model is calibrated to the Japanese economy and is used to mea sure the importance of both these effects. We find that, under a wide range of parameters, net expansionary effects are quantitatively small, thus sug gesting a limited role for fiscal stabilization (C) 2001 Elsevier Science B .V. All rights reserved.