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FISCAL POLICY CHANGES AND LABOR MARKET DYNAMICS IN JAPAN’S LOST DECADE

Published online by Cambridge University Press:  15 February 2021

Julen Esteban-Pretel ,
Xiangcai Meng  and
Ryuichi Tanaka
Julen Esteban-Pretel
Affiliation:
City University of New York
Xiangcai Meng
Affiliation:
Woosong University
Ryuichi Tanaka*
Affiliation:
The University of Tokyo
*
Address correspondence to: Ryuichi Tanaka, Institute of Social Science, The University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo 113-0033, Japan. e-mail: ryuichi.tanaka@iss.u-tokyo.ac.jp. Phone: +81-3-5841-4982, Fax: +81-3-5841-4982.
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Abstract

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Japan’s so-called Lost Decade of the 1990s presents a unique case study of an economy with a recent severe and prolonged recession, with large changes in the labor market and fiscal policy as the main policy available to the government. Japanese unemployment rate surged from 2.1% in 1991 to 5.4% in 2002. Meanwhile, the Japanese economy experienced a rise in government expenditures, while taxes remained fairly stable. This paper quantitatively evaluates the impact of these changes in fiscal policies on labor market variables, in particular the unemployment rate, during the 1990s. We build, calibrate, and simulate a dynamic general equilibrium model with search frictions in the labor market, a productive government sector, heterogenous government spendings, and different categories of taxes. Our model is able to reproduce the paths of the main labor market variables, and the counterfactual experiments show that the changes that took place in the different spending components affected the unemployment rate heterogeneously, although overall they kept unemployment lower than it could have been. We also find that had the government also implemented countercyclical tax policies, unemployment would not have risen as much as it did by 2002.

Keywords

Fiscal PolicySearch and MatchingEndogenous Job DestructionHeterogenous Government ExpenditureProductive Government SectorJapan’s Lost Decade
Type
Articles
Information
Macroeconomic Dynamics , Volume 26 , Issue 7 , October 2022 , pp. 1691 - 1730
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted re-use, distribution, and reproduction in any medium, provided the original work is properly cited.
Copyright
© Cambridge University Press 2021

Footnotes

*

The authors wish to thank Javier Andrés, Junichi Fujimoto, Pedro Gomes, Daiji Kawaguchi, Hiroaki Miyamoto, Ryo Nakajima, Yasuyuki Sawada, Hiroshi Teruyama, and participants at 1st Workshop ANAECO, in Valencia (Spain) for valuable comments and discussions. The authors acknowledge financial support for this project by the Ministry of Education, Culture, Sports, Science and Technology of Japan through the Grant-in-Aid for Scientific Research (Grant Numbers 24330063 for Julen Esteban-Pretel, and 20H05629 for Ryuichi Tanaka), from the Policy Research Center at the National Graduate Institute for Policy Studies. Julen Esteban-Pretel also acknowledges financial support from PSC-CUNY (Award # 69440-00 47), as well as support provided for this project by a PSC-CUNY Award, jointly funded by The Professional Staff Congress and The City University of New York (Award #69440-00 47). All remaining errors are our own.

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