Regional Heterogeneity, the Rise of Public Debt and Monetary Policy in Post-Bubble Japan: Lessons for the EMU

Raphael Fischer; Gunther Schnabl

April 2018

Abstract

Both Japan and parts of the European Monetary Union have experienced boom and bust in stock and real estate markets, which have been followed by a lasting crisis. The paper analyses the role of a high degree of regional heterogeneity for public debt and monetary policy in the context of crisis. It is shown for Japan that the attempts to maintain regional cohesion via a regional transfer mechanism has contributed to the unprecedented rise in public debt and persistent monetary expansion. Econometric estimations show that in Japan regional redistribution of funds has ensured homogeneous living conditions across Japanese regions pre- and post-crisis. The side condition is monetary expansion. A similar effect could emerge in Europe, if the crisis persists.

Keywords: , , , , .

JEL Codes: , , .

Erschienen in

International Economics and Economic Policy (April 2018), Volume 15, Issue 2, pp 405–428.

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Monetary Policy and Structural Decline: Lessons from Japan for the European Crisis

Gunther Schnabl

Juni 2015

Abstract

Japan experienced a boom-and-bust cycle in the real estate and stock markets almost 20 years earlier than Europe. Since the bursting of the Japanese bubble economy, the country has fallen into a deep recession and has experimented with crisis therapies in the form of unconventional monetary expansion, Keynesian fiscal stimulus, and recapitalization of financial institutions. Japan reached a low interest rate environment in the mid 1990s and has accumulated an exceptionally high level of public debt during more than two decades of economic stagnation. This paper compares the boom-and-bust cycles in Japan and Europe with respect to the reasons for excessive booms, the characteristics of the crises, and the (potential) effects of the crisis therapies. It is argued that in both Japan and Europe the consequences of expansionary monetary and fiscal policies include the hysteresis of a low-interest rate and high government debt environment, the erosion of the allocation and signaling functions of the interest rate, the gradual quasi-nationalization of financial institutions, as well as gradual real income losses. The economic policy implication for Europe and Japan is the timely exit from crisis therapies in the form of excessively expansionary monetary and fiscal policies.

Keywords: , , , , , , , , , , , , .

JEL Codes: , , , , , , .

Erschienen in

Asian Economic Papers, Volume 14, Issue 1, pp 124-150.

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