Working Paper: NBER ID: w12357
Authors: Takero Doi; Toshihiro Ihori; Kiyoshi Mitsui
Abstract: The purpose of this paper is to analyze sustainability issues of Japan's fiscal policy and then to discuss the debt management policy using the theoretical models and numerical studies. We also investigate the desirable coordination of fiscal and monetary authorities toward fiscal reconstruction.\n\tWe include a potential possibilities of the government bonds in our theoretical model. The public bonds, therefore, cannot be sold when the issuance leads the amount of debt outstanding to be more than a certain level. In this respect, the fiscal authority has to take into account the upper limit of stocks of public debt.\n\tThis possibility of debt default provides the fiscal authority to issue public bonds strategically in an earlier period. A strategic behavior of fiscal authority induces the monetary authority, in a later period, to boost output and raise seigniorage revenues to eliminate the distortion of resource allocation due to the limitation on debt issuance. Therefore, the monetary policy in a later period suffers from an inflation bias from the ax ante point of view.\n\tThere are two ways to eliminate this distortion toward successful fiscal restoration. One of them is to make the monetary authority more conservative than society in the sense that the price stability weight of monetary authority is higher than that of society. The other way of eliminating the distortion of the resource allocation is to design an institutional ceiling on the debt issuance. The direct ceiling can provide a binding constraint of the public bond issuance for the fiscal authority of Japan because it has accumulated the debt outstanding much more than other countries.
Keywords: No keywords provided
JEL Codes: H63; H21; E63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Issuance of public bonds (H74) | Fiscal sustainability (H68) |
| Outstanding debt surpassing a certain threshold (H63) | Debt default scenario (H63) |
| Fiscal authority's actions in one period (E62) | Monetary authority's response in a subsequent period (E49) |
| Increased conservativeness of monetary authority (E58) | Higher weight on price stability (E64) |
| Institutional ceiling on debt issuance (H63) | Binding constraint for fiscal authority (H60) |