Fiscal Policy Conditions for Government Budget Stability and Economic Recovery: Comparative Analysis of Japan and Greece
Yoshino, Naoyuki; Taghizadeh-Hesary, Farhad; Mizoguchi, Tetsuro | July 2018
Abstract
In the literature regarding fiscal sustainability, the Domar condition and Bohn’s condition are often used to check whether a government’s debt situation is in a dangerous zone. This paper first shows that the Domar condition is obtained only from the government budget constraint (namely the supply of government bonds) and does not take into account the demand for government bonds. Second, this paper reveals that Bohn’s condition does not satisfy the condition of economic stability: even if this is satisfied, economic recovery may not be achieved. This paper will propose a new condition that satisfies both the stability of the government budget and the recovery of the economy. The paper’s empirical findings from Japan demonstrate that in order to achieve fiscal sustainability, both sides of the Japanese government budget (expenditure and revenue) must be simultaneously adjusted while the decline in government expenditure has to exceed the increase in tax revenue. In addition, the paper provides a comparative analysis of Japan and Greece as evidence of the aforementioned condition, and proves that although Japan’s debt-to-GDP ratio is higher than that of Greece, its bond market remains stable. This is because it comes from the demand side of the market and investors have greater confidence in this economy due to its lower credit risk rooted in the country’s macroeconomic strength and more auspicious economic future.
Citation
Yoshino, Naoyuki; Taghizadeh-Hesary, Farhad; Mizoguchi, Tetsuro. 2018. Fiscal Policy Conditions for Government Budget Stability and Economic Recovery: Comparative Analysis of Japan and Greece. © Asian Development Bank Institute. http://hdl.handle.net/11540/8457.Keywords
Regional Development Finance
Public Scrutiny of City Finances
Non-Bank Financial Institutions
Local Government Finance
Government Financial Institutions
Foreign and Domestic Financing
Financial Risk Management
Assessing Corporate Governance
Good Governance
Governance Approach
Urban Development Finance
Trade Finance
Small Business Finance
Rural Finance
Roundtable on International Trade and Finance
Regional Development Finance
Finance
Public Finance
Governance
National Budget
Budgetary Policy
Educational Budget
Public Financial Management
Financial System
Financial Statistics
Public Accounting
Business Financing
Subsidies
Social Equity
Economic Equity
Project Risks
Project Impact
Public Administration
Corporations
Taxation
Public Debt
Local Government
Debt Management
Taxation
Public Accounting
National Budget
Municipal Bonds
Local Government
Local Taxes
International Monetary Relations
International Financial Market
International Banking
Central Banks
Business Financing
Financial Aspects
Taxation
Public Debt
Local Government
Debt Management
Pension Funds
Mutual Funds
Social Equity
Financial Aspects
Fiscal Policy
Investment Requirements
Banks
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Tax administration and procedure
Tax policy
Effect of taxation on labor supply
Decentralization in government
Community power
Corporate divestment
Civil government
Delegation of powers
Equality
Neighborhood government
Subnational governments
Delivery of government services
Local taxation
Options
Government
Local government
Taxation
Grants
Loans
Use tax
Taxing power
State of taxation
Tax-sales
Tax revenue estimating
Tax planning
Spendings tax
Special assessments
Tax administration and procedure
Sales tax
Real property and taxation
Progressive taxation
Effect of taxation on land use
Effect of taxation on labor supply
Intergovernmental tax relations
Local taxation
Options
Government
Local government
Taxation
Employee pension trusts
Investment management
Investments
Multiemployer pension plans
Keogh plans
Individual retirement accounts
Pension plans
Employee pension trusts
Pension trusts
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