abenomics and optimal fiscal policy rule to make fiscal consolidations
DESCRIPTION
This presentation was given at the 2014 ADBI-Keio Executive Training in Economics which was held in Keio University and ADBI, Tokyo on 3-7 November 2014.Read more about the event: http://bit.ly/1UoJdFvTRANSCRIPT
ADBI-Keio Executive Training in Macroeconomics
3-7 November 2014 Conference Hall, North Building
Keio University, Mita Campus
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The views expressed in this presentation are the views of the author and do not necessarily reflect the views or policies of the Asian Development Bank Institute (ADBI), the Asian Development Bank (ADB), its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms.
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Abenomics and
Optimal Fiscal Policy Rule to make Fiscal Consolidations
Naoyuki Yoshino Keio University
[email protected] Tetsuro Mizoguchi Reitaku University
November 2014
Abenomics: 3 Arrows (1) Aggressive Monetary Policy (2) Growth Strategy (3) Fiscal Consolidations
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4
5
6
Gross Debt/GDP ratio, 2012 Japan, USA, EU
7 Source: CIA Fact Book
0
50
100
150
200
250 JapanGreeceItalyPortugalIrelandBelgiumFranceUnited KingdomSpainHungaryCyprusGermany
Money Supply
Money Demand
Household
Borrowings ๏ผ-5๏ผ
Borrowings ๏ผ-8๏ผ
Securities ๏ผ+2๏ผ
PNFCs
Government
Borrowings ๏ผ-3๏ผ
Bonds etc๏ผ+50๏ผ
Depository Corporations
Lending๏ผ+1๏ผ
Securities๏ผ+19๏ผ
Deposits๏ผ+29๏ผ
Securities ๏ผ-2๏ผ
Life and Non-life Insurances Lending ๏ผ-3๏ผ
Securities๏ผ+5๏ผ
Insurance & Pension Reserve๏ผ+1๏ผ
Other financial Intermediaries
Lending ๏ผ-20๏ผ
Securities ๏ผ-4๏ผ
Deposits with the Fiscal Loan Fund
๏ผ-1๏ผ Borrowings
๏ผ-7๏ผ Securities
๏ผ-7๏ผ
Financial Intermediaries
Household
Deposits๏ผ+10๏ผ
Securities ๏ผ-4๏ผ
Insurance & Pension
Reserve ๏ผ+1๏ผ
Deposits ๏ผ+13๏ผ
Securities ๏ผ-2๏ผ
PNFCs
Government Deposits with the Fiscal Loan Fund
๏ผ+1๏ผ Securities๏ผ+9๏ผ
2013 Money Flow in Japan Source: BOJ Flow of Fund
Changes in Japanโs Money Flow High Growth Period Households Savings Corporate Capital Investment Stock S I K Recent Period Corporate Savings Government Elderly people S G Abolish Retirement Age Increase working population Pension payment will start 65 or later Wage rate be based on marginal productivity
9
Population Trends in Japan
10
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060
Age 65 and over
Age 15-64
Age 14 and less
Aged to PopulationRatio
Employment toPopulation Ratio
Current Birth Ratio
Source: Ministry of Internal Affairs and Communication
Forecasts (2012 current) 10 of Thousands Current
Figures
11
Trends of Householdsโ Savings Ratio and Government debt/Householdsโ financial assets
12 Source: MOF
Budget Allocation of Central Government (Japan, 1985-2012)
13
Source: MOF Billion
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
Bond Expenditure
Education and Science
Social Securities
Defense
Exp of Local Government
National land conservationand development
Issues of Various Government Bond
Short term 1 to 5 years (Banks, Postal Saving) 10 years (Trust Banks, Insurance) Inflation indexed bond 15 year (floating bond) 20 year (Insurance, Pension Funds, Kampo) 30 year (Insurance, Pension funds) 40 year (Pension fund, Insurance)
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15
Japanese Debt, 92% are held by Domestic Investors HOLDERS %
Banks and Postal Savings 45% Life and Non-life Insurances 20% Public Pension funds 10% Private Pension Funds 4% Central Bank of Japan 8% Overseasโ Investors 8% Households 5% Others 3%
16 Source: MOF
Greece, 80% of their debts are held by overseasโ Investors (2011)
HOLDERS ๏ผ Eurozone 15% ECB 15% IMF 6% Greek banks & non-banks 23% Other European Banks 10% Non European Banks 8% Non-Greek non-Banks 23%
Source๏ผFinancial Times 17
Declining Bank Loans in Japan
1. Stricter Basel Capital Requirement (Basel III) 2. Government Bonds = Zero Risk 3. Declining Domestic Demands for Bank Loans Shift production from Japan to other Asia Low expected rate of return 4. Corporationsโ Surplus Profits from Overseasโ production Cash rich companies
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Decline in Loan demand (80%)
20
ๅบๆใ Revankar and Yoshino (2008)
where
๐๐๐๐=Interest Rate ๐ผ๐ผ๐๐=Growth rate
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๐๐๐๐ โ ๐๐๐๐โ๐๐ =๐๐๐๐ โ ๐ผ๐ผ๐๐๐๐ + ๐ผ๐ผ๐๐
๐๐๐๐โ๐๐ + ๐๐๐๐ โ ๐๐๐๐
๐๐๐๐ =๐ฉ๐ฉ๐๐๐๐๐๐
,๐๐๐๐โ๐๐ =๐ฉ๐ฉ๐๐โ๐๐๐๐๐๐โ๐๐
,๐๐๐๐ =๐ฎ๐ฎ๐๐๐๐๐๐
, ๐๐๐๐ =๐ป๐ป๐๐๐๐๐๐
Domar Condition
Domar Condition โข Domar (1974) studies the USA government debt
dynamics. In his paper, the primary balance can be interpreted in the context of Economics.
โข Assuming that the economy grows, the soundness of public finance can be measured by the debt / nominal GDP ratio.
โข Here we can suppose the nominal GDP at period t as ๐๐๐ก๐ก and the bond level at period t as ๐ต๐ต๐ก๐ก. Then, we can write the debt/GDP ratio as ๐ต๐ต๐ก๐ก
๐๐๐ก๐ก.
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Interest rate and Economic growth rate ๏ผ1990-2012๏ผ
Source: MOF and Ministry Cabinet 23
Domar Condition does not hold in Japan
-8
-6
-4
-2
0
2
4
6
8
10
Nominal GDP GrowthRateLong-term Interest Rate
0
0.5
1
1.5
2
2.5Ja
nuar
y-00
Janu
ary-
01
Janu
ary-
02
Janu
ary-
03
Janu
ary-
04
Janu
ary-
05
Janu
ary-
06
Janu
ary-
07
Janu
ary-
08
Janu
ary-
09
Janu
ary-
10
Janu
ary-
11
Janu
ary-
12
Janu
ary-
13
5-year10-year
Source: MOF
Japanese Government Bond Yields
Japanโs Supply and Demand for Bonds
25
๐๐๐ก๐ก
โ๐ต๐ต๐ก๐ก
๐ธ๐ธ1 ๐ธ๐ธ2
โ๐ต๐ต๐ก๐ก๐๐
๐ธ๐ธ3 ๐ธ๐ธ4
โ๐ต๐ต๐ก๐ก๐ท๐ท
๐ธ๐ธ1 โ ๐ธ๐ธ2 โ ๐ธ๐ธ3 โ ๐ธ๐ธ4
Gov long-term bond yield (Eurozone)
Eurozone 5-year CDS
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๐๐๐ก๐ก
โ๐ต๐ต๐ก๐ก
๐ธ๐ธ1 โ ๐ธ๐ธ2 โ ๐ธ๐ธ3 โ ๐ธ๐ธ4 ๐ธ๐ธ2
โ๐ต๐ต๐ก๐ก๐๐
๐ธ๐ธ3
๐ธ๐ธ4
โ๐ต๐ต๐ก๐ก๐ท๐ท
๐ธ๐ธ1
Greece Supply and Demand for Government bonds
Greek Case and Japanese Case โข Greek Case Foreign fund โ large Domestic Deposits โSmall โIn GGB market, Foreign funds flow out โInterest Rate goes up โข Japanese Case Foreign fund โ Small Domestic Deposits โLarge โIn JGB market, Domestic deposits flow into the JGB market โinterest rate deflates, whereas the supply of JGB is sufficiently large.
Objective Loss Function of the Government (i) Sustainable Debt /GDP ratio, (ii) Stable Economic Growth, (iii)Smooth Government Spending (iv)Smooth Tax revenue Minimize the following loss function: ๐๐ ๐ฉ๐ฉ๐๐,๐๐๐๐,๐ฎ๐ฎ๐๐,๐ป๐ป๐๐
=๐๐๐๐๐๐๐๐ ๐ฉ๐ฉ๐๐ โ ๐ฉ๐ฉ๐๐โ ๐๐ +
๐๐๐๐๐๐๐๐ ๐๐๐๐ โ ๐๐๐๐
๐๐ ๐๐
+๐๐๐๐๐๐๐๐ ๐ฎ๐ฎ๐๐ โ ๐ฎ๐ฎ๐๐โ๐๐ ๐๐ +
๐๐๐๐๐๐๐๐ ๐ป๐ป๐๐ โ ๐ป๐ป๐๐โ๐๐ ๐๐
where ๐ค๐ค๐๐ ๐๐ = 1,โฏ , 4 , โ ๐ค๐ค๐๐ = 14๐๐=1 are the policy
weights which government chooses.
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Supply and Demand for Government bond ๐๐๐ก๐ก โ ๐๐๐ก๐ก + ๐๐๐ก๐ก๐ต๐ต๐ก๐กโ1 + ๐๐๐บ๐บ๐ก๐ก = ๐ถ๐ถ๐ก๐ก + ๐๐๐ก๐ก
Government Flow Budget Constraint (Bond Supply) ๐๐๐ก๐ก โ ๐๐๐ก๐ก + ๐๐๐ก๐ก๐ต๐ต๐ก๐กโ1 + ๐๐๐บ๐บ๐ก๐ก = ๐ถ๐ถ๐ก๐ก + ๐๐๐ก๐ก where ๐๐๐ก๐ก = ๐ฅ๐ฅ๐ต๐ต๐ก๐ก + ๐ฅ๐ฅ๐๐๐ก๐ก
๐ท๐ท โ โ๐๐๐ก๐ก๐น๐น(Bond Demand)
๐ถ๐ถ๐ก๐ก = ๐๐0 + ๐๐1๐๐๐๐๐ก๐ก Consumption Equation ๐๐๐ก๐ก = ๐๐0 + ๐๐1๐๐๐๐๐ก๐ก + ๐๐2๐๐๐ก๐กDepositEquation ๐๐๐๐๐ก๐ก = ๐๐๐ก๐ก + ๐๐๐บ๐บ๐ก๐ก + ๐๐๐ก๐ก๐ต๐ต๐ก๐กโ1 โ ๐๐๐ก๐ก = ๐ถ๐ถ๐ก๐ก + ๐๐๐ก๐ก Disposable Income
Macroeconomic Model (Supply and Demand for Gov.
Bonds)
Optimal Fiscal Policy Rule
๐บ๐บ๐ก๐ก โ ๐บ๐บ๐ก๐กโ1 = ๐ผ๐ผ1 ๐ต๐ต๐ก๐ก โ ๐ต๐ต๐ก๐กโ + ๐ผ๐ผ2 ๐๐๐ก๐ก โ ๐๐๐ก๐ก๐๐
where ๐ผ๐ผ1 = โ๐ค๐ค1๐ค๐ค3
1+ ๐๐1+๐๐1โ1 ๐๐ ๐ต๐ต๐ก๐กโ1๐๐1+๐๐1 ๐ต๐ต๐ก๐กโ1โ๐๐2
,๐ผ๐ผ2 = ๐ค๐ค2๐ค๐ค3๐๐
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Optimal Tax Rule
๐๐๐ก๐ก โ ๐๐๐ก๐กโ1 = ๐ฝ๐ฝ1 ๐ต๐ต๐ก๐ก โ ๐ต๐ต๐ก๐กโ + ๐ฝ๐ฝ2 ๐๐๐ก๐ก โ ๐๐๐ก๐ก๐๐
where ๐ฝ๐ฝ1 = โ๐ค๐ค1๐ค๐ค4
๐๐2๐๐1+๐๐1 ๐ต๐ต๐ก๐กโ1โ๐๐2
,๐ฝ๐ฝ2 = ๐ค๐ค2๐ค๐ค4
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Stable Equilibrium level of Interest Rate & Bond
๐ฉ๐ฉ๐๐ = ๐ ๐ ๐๐ ๐ป๐ป๏ฟฝโ๐ฎ๐ฎ๏ฟฝ
๐๐โ๐๐๐๐โ๐ ๐ ๐๐ ๐๐๐๐๐๐โ ๐๐โ๐ฝ๐ฝ ๐๐+๐๐๐๐+๐ ๐ ๐๐ ๐ฎ๐ฎ๏ฟฝ+๐พ๐พ๐ซ๐ซ+๐พ๐พ๐ญ๐ญโ ๐๐๐๐+๐ ๐ ๐๐
๐๐๐๐๏ฟฝ =๐ป๐ปฬ โ ๏ฟฝฬ ๏ฟฝ๐ฎ ๐๐ โ ๐๐๐๐ โ ๐ ๐ ๐๐ ๐๐๐๐
๐๐ โ ๐๐ โ ๐ฝ๐ฝ ๐๐ + ๐๐๐๐ + ๐ ๐ ๐๐ ๏ฟฝฬ ๏ฟฝ๐ฎ + ๐พ๐พ๐ซ๐ซ๏ฟฝ + ๐พ๐พ๏ฟฝ ๐ญ๐ญ โ ๐๐๐๐ + ๐ ๐ ๐๐
๐ ๐ ๐๐๐ป๐ปฬ โ ๐ ๐ ๐๐๏ฟฝฬ ๏ฟฝ๐ฎ
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Generational Inequality Aged People have strong VOICEโVoting Right Young generation do not have any Voting Right. Young people do not go for Voting. Aged People wants to receive benefits. Japanese Pension Scheme -- Pay as you go system In 1950s, Retirement Age 55, Life expectancy 59 In 2010, Retirement Age 60,65, Life expectancy 88 We proposed to start pension payments from 60->65->70 by allowing old people to work Japanese Survey shows many people want to work
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