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4 MacroPolicy Japan

4 MacroPolicy Japan - 4 Macroeconomic Policy Getting out of...

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Econ163 Macroeconomic Policy 1 4. Macroeconomic Policy Getting out of recession Importance of the aggregate demand (explained in Flath’s textbook, pp.111-120) If the shortage of demand is responsible for recession, expansionary macroeconomic policy would work Fiscal expansion Monetary expansion
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Econ163 Macroeconomic Policy 2 Japanese Fiscal Policy in the 1990s Budget deficit is a measure of fiscal policy stance High budget deficit Government is spending a lot more than it collects Large stimulus to the economy Budget deficits in the 1990s suggest that Japanese fiscal policy was expansionary except for FY1996 and FY1997
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Econ163 Macroeconomic Policy 3 Budget Deficit: FY1990-2002 -8 -6 -4 -2 0 2 4 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Fiscal Year % of GDP Full Employment Budget Deficit Cyclical Budget Deficit
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Econ163 Macroeconomic Policy 4 Stimulus Packages in the 1990s Fiscal expansion in the 1990s was the result of numerous stimulus packages implemented through supplementary budgets Announced size of a stimulus package is often misleading because it includes the expenditures that do not constitute fiscal expansion Examples: purchases of land for public works, subsidized government loan programs, front loading of the previously committed public works The part of a stimulus package that truly is fiscal expansion is called mamizu (clear water)
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Econ163 Macroeconomic Policy 5 Mamizu part is what matters Example: Stimulus package announced on 11/11/1999 Advertised as ¥18.1 trillion (3.6 % of GDP) package Mamizu was ¥5.9 trillion (1.1% of GDP), which is not small but not as big as it was announced
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Econ163 Macroeconomic Policy 6 Fiscal Contraction in FY1996 and FY1997 Expenditures did not increase very much Consumption tax increase (3% to 5%) Phasing out of income tax cut Increasing co-payment on national health insurance This mistake in fiscal policy aborted the recovery of the Japanese economy
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