Working Paper: NBER ID: w31850
Authors: Yili Chien; Harold L. Cole; Hanno Lustig
Abstract: As a result of the BoJ’s large-scale asset purchases, the consolidated Japanese government borrows mostly at the floating rate from households and invests in longer-duration risky assets to earn an extra 3% of GDP. We quantify the impact of Japan’s low-rate policies on its government and households. Because of the duration mismatch on the government balance sheet, the government’s fiscal space expands when real rates decline, allowing the government to keep its promises to older Japanese households. A typical younger Japanese household does not have enough duration in its portfolio to continue to finance its spending plan and will be worse off. Low-rate policies tax younger, poorer and less financially sophisticated households.
Keywords: Japan; low-rate policies; fiscal sustainability; financial repression; household welfare
JEL Codes: E63; F30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Declining real interest rates (E43) | Increased fiscal capacity of the government (E62) |
| Increased fiscal capacity of the government (E62) | Greater spending (H59) |
| Declining real interest rates (E43) | Reduced consumption possibilities for younger households (D15) |
| Reduced consumption possibilities for younger households (D15) | Welfare loss (D69) |
| Government's duration mismatch on its balance sheet (E62) | Increased fiscal capacity as real rates decline (E62) |
| Financial repression by the government (G28) | Increased financial strain on younger households (G59) |