Fiscal remedies for Japan's slump

Laurence M. Ball

"This paper asks how a fiscal expansion would affect Japan. It uses a textbook-style macro model calibrated to fit the Japanese economy. According to the results, Japan%u2019s output slump would be ended by a fiscal transfer of 6.6% of GDP. This policy raises the debt-income ratio in the short run, but it reduces this ratio in the long run through higher inflation and tax revenue. The financing of the transfer -- bonds or money -- affects debt in the short run but not the long run"--National Bureau of Economic Research web site.