The role of fiscal policy in Japan: a quantitative study

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