Comment on “Estimating Non‐Keynesian Effects for Japan”

• DOI: http://doi.org/10.1111/j.1748-3131.2012.01239.x
• Published date: 01 December 2012
• Author: Kazumasa Iwata
• Date: 01 December 2012

Comment on “Estimating Non-Keynesian

Effects for Japan”

Kazumasa IWATA†

Japan Center for Economic Research

JEL codes: E62, H30, H62

Kameda (2012) investigates the existence of non-Keynesian effects for Japan by employ-

ing the near-vector autoregressive (near-VAR) model technique and including interac-

tion terms of fiscal instruments and two indicators such as the debt to gross domestic

product (GDP) ratio and the primary deficit to GDP ratio as independent variables.

Kameda detects significant non-Keynesian effects on economic activity when the initial

primary budget deficit is large, while Keynesian effects are dominant when the fiscal

position is sound. By computing one-standard-deviation bands for the impulse response

functions of the log of per capita GDP to changes in government expenditure and tax

revenue using Monte Carlo simulation, Kameda provides interesting evidence on non-

Keynesian effects which become significant as the primary deficit to GDP ratio gets

larger.

From his results, Kameda concludes that the consumption tax hike planned for

implementation in April 2014 and October 2015 will not likely dampen the economic

activity. Furthermore, Kameda denounces the use of government spending policy to

compensate for alleged negative impact triggered by tax increase, because increases in

government spending can be entirely counter-productive. The results Kameda obtains

seem to lend support to the hypothesis of an “expansionary contraction”when there are

large size budget deficits, thus negating the possibility of “self-defeating austerity” which

seems to have taken place in Greece and Spain.

Kameda’s policy prescription is in stark contrast to the findings generated by using a

conventional macro-econometric model which predicts a 0.3% decline in GDP due to a

1% increase in the consumption tax rate.

Assuming the existence of liquidity constrained households, the conventional Keyne-

sian econometric model disregards factors which may create non-Keynesian effects

through three possible channels: changes in expectations about future (distortionary) tax

burdens; changes in the possibility of a fiscal bankruptcy (the “expectations view”); and

labor market adjustments where changes in public wages affect the wage costs and profits

of the corporate sector (the “labor market view”). The near-VAR analysis does not iden-

tify the major channels of the non-Keynesian effects for Japan. The confirmation of the

channels through expectations and labor market adjustment should be examined by

employing micro-data based analysis.

†Correspondence: Kazumasa Iwata, Japan Center for Economic Research, 1-3-7 Otemachi,

Chiyoda-ku, Tokyo 100-8066, Japan. Email: iwata@jcer.or.jp

bs_bs_banner

doi: 10.1111/j.1748-3131.2012.01239.x Asian Economic Policy Review (2012) 7, 244–245

© 2012 The Author

Asian Economic Policy Review © 2012 Japan Center for Economic Research

244