Fiscal Reform as an Economic Stimulus Package:An Empirical Analysis using a Structured VAR Model

No.83
May 2000
Research Fellow Shinya Kinukawa

1. Amidst growing concern that Japan's budget deficit has reached a dangerous level, the government is proactively continuing its fiscal policies aimed at reviving the economy. At the same time, there is growing research pointing to the drop in Japan's fiscal policy multiplier, as well as to the existence of non-Keynesian effects-based mainly on Europe's experiences in the 1980s-indicating that large fiscal reform can stimulate the economy even in the short run. Thus, the current Japanese fiscal policy may not be appropriate as an economic stimulus package.
2. Using a structural VAR (Vector Autoregressive) model rather than a conventional macroeconomic model, this report analyzes both the size and direction of the effects of fiscal reform on Japan's GDP.
3. The results indicate that the decrease in the ratio between the budget deficit and nominal GDP, that is the shock from fiscal reform, can stimulate real GDP not only in the long term but also in the short run, verifying and supporting a non-Keynesian effect.
4. According to a survey by the Economic Planning Agency (EPA) and the Central Council for Financial Services Information, it is clear that many consumers increase savings as a result of insecurities about pensions and other future financial issues, thus leading to a suppression of consumption in the present. Combined with the above estimation results, those survey results strengthen the view that rather than merely continuing present fiscal policies, consumer spending can be increased through fiscal reform.

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