There have several argument have been proposed over the years about why fiscal policy was ineffective in Japan economy. There are few argument point out that the simple first-round positive effects of fiscal policy maybe be negated by the negative effect completely that show from the need of the government to cause the money in order to fund the fiscal expenditure.
(1)Interest Rate-Based Crowding Out
This is based on a Keynesian relationship between investment and interest rates ,it argues that crowding out of fiscal expenditure may occur via higher interest rates. This proposition of fiscal policy ineffectiveness is in line with classical theory, which
argued that government expenditure would result in an equal reduction in private
demand, via an increase in real interest rates. The crowding out effect of increasing the
government expenditure through higher interest rates is reflected in the IS-LM synthesis, standard Keynesian models and the mainstream monetarist models. There is no empirical evidence in their support. Some economists argued that during the first half of the 1990s, it increased bond issuance to fund fiscal spending would push up the long term interest rates and lower the bond price.
Despite brief periods of rising long-term nominal rates, nominal short-term and long-term interest rates have decline during the 1990s. There are only two instances where they rose: from 4.3% in 1993 to 4.4% in 1994, and from 1.3% in 1998 to 1.8% in 1999. However, in both cases rates subsequently resumed their decline to new lows. Also, we find that short-term real interest rates decrease from 4.2%in 1991 to 0.11% in 2000, while the long-term real interest decline from 3.0% in 1991 to 0.7% in 1998, but in 2000, it rises to 2.5% on average. These real rates were lower than during the 1980s. These facts contradict interest rate crowding out argument
This is based on a reduction in consumption and an increase in savings that affect by increasing fiscal spending. This show that consumers will believe that any fiscal spending funded by the issuance of government debt will require the debt to be fully paid off in the relevant future by raising taxes on individuals. Then for every yen in government spending, rational consumers would increase savings by one yen because they are preparing the money to repay the government in the future.#p#分页标题#e#
One of the analytical problem with this model is that it does not allow for the possibility that debt will be paid off such as money creation, higher corporate taxes and economic growth that increase tax revenues without raising asset sales or individual taxes to foreign investors. It is not clear why rational consumers would not consider these possibilities. Also that the assumptions are restrictive. The most basic test of Ricardian equivalence use to compare the change of government expenditure and household savings.
Fiscal Policy was Effective
The Keynesian View
This case for fiscal policy effectiveness was made by Ito (2000), when short-term nominal interest rates had propinquity zero. Simultaneously, the economy was in a liquidity trap, the LM curve horizontal and the demand for money perfectly interest-elastic. Conversely, the interest reductions had not stimulated investment, that investment was IS curve vertical and perfectly interest-inelastic. Thus without any crowding out, monetary policy would be ineffective and fiscal policy unusually effective. Hence Ito advocated further fiscal stimulation as being effective in such a zero interest environment. About a horizontal LM curve, it is describing the case of short-term nominal interest rates that have decline to low levels that they do not fall further. During the period of 1990s interest rates really decline steadily, Ito restricts his argument to time periods that exclude the entire period. .
An empirical evaluation of the effectiveness of fiscal policy also depends on the size of the expected impact of fiscal expenditures. Y1trn of fiscal expenditures would result in a increase in economic activity larger than Y1trn, While the Keynesian model implies a â€˜multiplierâ€™. Many proponents of fiscal policy effectiveness have adopted a far more cautious approach to fiscal policy effectiveness. Many private sector economists and government argued that a public works project worth Y1trn would increase nominal GDP by Y1trn to estimate the expected impact of fiscal policy. A spending package amounting to 2% of GDP was commonly expected to increase GDP by 2 percentage points. About the empirical evidence, Posen (1998) argues that in the period of 1990s, fiscal policy has been effective in Japan. In his view, actual fiscal spending has been smaller than the headline figures for the packages. He argues that fiscal spending has not been enough large to stimulate the economy. A suitably sized fiscal expansion would have been effective in ending economic stagnation and deflation. However, actual GDP-based expenditure data or statistics for the government borrowing requirement yield reasonably accurate measures of the fiscal stance. Also, Posen provides no such empirical test of fiscal policy effectiveness. We found that sizeable fiscal stimulation failed to stimulate the economy. Furthermore, there is no evidence that even the first-round effect resulted from the spending.#p#分页标题#e#