Long-run mild deflation under fiscal unsustainability in Japan
Year: 2020
Type: preprint
Abstract: A macroeconomic policy debate has been ongoing in Japan for over the past two decades, with one side proposing drastic fiscal reforms to avoid hyperinflation and the other recommending expansionary policies to escape from a liquidity trap. However, neither side has been able to explain why mild deflation has continued for such a long time, despite primary budget deficits and unprecedented monetary expansion. This paper presents an alternative theory, arguing that fiscal sustainability will be restored in the future not as a result of drastic fiscal reforms, hyperinflation, or continuous mild inflation, but largely through a one-off surge in the price level, such that the price level becomes several times higher than before. Such a price surge is considered a rare event accompanied by catastrophic endowment shocks in the following years. Within this framework, mild deflation coexists with fiscal unsustainability until this sharp surge in the price level occurs.
Author: Makoto Saito
Language: English
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W3004453004