Estimating Non‐Keynesian Effects for Japan

• DOI: http://doi.org/10.1111/j.1748-3131.2012.01238.x
• Author: Keigo Kameda
• Date: 01 December 2012
• Published date: 01 December 2012

Estimating Non-Keynesian Effects for Japan

Keigo KAMEDA†

Kwansei Gakuin University

Is a fiscal stimulus effective? This classical question has received significant researchattention since

the collapse of the global financial services firm Lehman Brothers. Although most studies agree on

the existence of Keynesian multiplier effects, several studies also demonstrate the existence of non-

Keynesian effects. What explains this lack of consensus in the literature? In this paper, we aim to

bridge the two views by estimating a near-vector autoregressive system that includes interaction

terms of fiscal instruments, and the debt-to-gross domestic product (GDP) or the primary-deficit-

to-GDP ratios. Moreover, to embed the dynamics of the debt-to-GDP ratio in the analysis, we

explicitly incorporate the government budget constraint. By computing and comparing the

impulse response functions, we find Keynesian effects when fiscal conditions are sound, and non-

Keynesian effects when the primary deficit is large.

Key words: budget deficit, fiscal balance, fiscal multiplier, Japanese economy, non-Keynesian

effects, public debt

JEL codes: E62, H30, H62

1. Introduction

Is a fiscal stimulus effective? This classical question has received significant research

attention since the collapse of the global financial services firm Lehman Brothers

(Krugman, 2008; Barro, 2009; Feldstein, 2009). The empirical literature does not provide

a clear answer to this question because the studies have varied in regard to sample

periods, sample countries, analytical frameworks such as the vector autoregressive (VAR)

approach, and the methodologies for the identification of fiscal shocks in the VAR

approach. However, all but a few agree on the existence of Keynesian multiplier effects

(Hebous, 2011).

On the other hand, there are also some studies demonstrating the existence of non-

Keynesian effects. The seminal study of Giavazzi and Pagano (1990) shows that a fiscal

contraction enhanced economic growth in Denmark and Ireland through an increase in

expected future permanent income due to a lower possibility of fiscal bankruptcy, espe-

cially in bad fiscal situations. Perotti (1999), Giavazzi et al. (2000), and Giavazzi et al.

(2005) followed up Giavazzi and Pagano’s (1990) study and, using multi-country panel

I am grateful to Kazumasa Iwata, NaoyukiYoshino, and all the participants of the Asian Economic

Policy Review Conference on“Fiscal Policy and Sovereign” Debt held on March 25, 2012,for their

helpful comments. This study is supported by the Japan Society for the Promotion of Science

(Grant-in-Aid for Scientific Research #19730234). The responsibility for any errorsin the text is, of

course, entirely the author’s.

†Correspondence: Keigo Kameda, School of Policy Studies, Kwansei Gakuin University, 2-1,

Gakuen, Sanda, Hyogo 669-1337, Japan. Email: kameda@kwansei.ac.jp

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doi: 10.1111/j.1748-3131.2012.01238.x Asian Economic Policy Review (2012) 7, 227–243

© 2012 The Author

Asian Economic Policy Review © 2012 Japan Center for Economic Research 227

data, confirmed the effects of fiscal stimuli can be negative when fiscal conditions are

bad. In addition, Alesina et al. (2002) and Ardagna (2004) show that a reduction of both

taxes and public spending relevant to labor markets, such as government wages,

enhanced private investment and gross domestic product (GDP) since the reductions

benefit the business sector, which in turn invested more.

Do poor fiscal conditions depress the Keynesian effects? To answer this question,

we construct a near-VAR that includes interaction terms of government expenditure or

tax revenue and the debt-to-GDP or primary-deficit-to-GDP ratio. Following Favero

and Giavazzi (2007), to embed the dynamics of the debt-to-GDP ratio in the analysis,

we explicitly incorporate the government budget constraint. From the near-VAR, we

then compute impulse response functions (IRFs, hereafter) changing artificially the

initial level of debt-to-GDP or primary-deficit-to-GDP ratio, and examining how the

demand enhancement effect changes with the changes in the initial level of these

ratios.

This paper is organized as follows. Section 2 reviews non-Keynesian studies. Section

3 explains the statistical methodology and the data to be used in the analysis in this

paper. Section 4 presents estimates of the IRFs, as well as our finding that only the

primary-deficit-to-GDP ratio influences the demand enhancement effects of govern-

ment expenditure and tax revenues and that non-Keynesian effects are observed when

the primary deficit is large. Finally, Section 5 discusses the policy implications of our

results and presents our conclusions.

2. Literature on Non-Keynesian Effects

Giavazzi and Pagano (1990) estimate consumption functions for Denmark and Ireland

following fiscal consolidation in the 1980s, and find that the observed forecast errors

could not be explained by the Keynesian view. They attributed this consumption puzzle

to the expected future tax reductions, calling these effects the “expectations view” of the

transmission channels of fiscal policy, or simply the “non-Keynesian effect.”

Following this seminal study, studies have mostly proceeded in two directions: one

examining the theoretical foundations of the non-Keynesian effects, and the other

exploring their generality, that is, whether these non-Keynesian effects can be found in

countries other than Denmark and Ireland. First, we summarize the literature examin-

ing the theoretical foundations of non-Keynesian effects. Table 1 shows the theoretical

predictions concerning the relationship between fiscal expansion and private consump-

tion. The traditional Keynesian view suggests that an increase in government expendi-

ture and/or tax reduction drives up consumption, while the very basic new classical

framework, such as the Ramsey model, indicates that a persistent increase in fiscal

expenditure crowds out private consumption to exactly the same extent, so that a tax

reduction has no effect on private consumption, as in the Ricardian equivalence

proposition.

However, it is important to note that a tax hike can possibly increase consumption

when taxation is distortional (Blanchard, 1990). Moreover, it is also worthwhile

Non-Keynesian Effects for Japan Keigo Kameda

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