Ricardian Equivalence and Fiscal Policy Effectiveness in Japan

The present paper asks whether there is a limit to the potential for government spending to stimulate output in the Japanese economy. Overlapping generations and Ricardian infinite horizon representative agent models are developed, in which the government spending multiplier falls as the level of spending rises. Consistent with the Ricardian hypothesis, vector autoregressions (VAR) indicate that the timing of taxes has little impact on national output. Conversely, the impact of government spending is significant. However, using non‐linear VAR techniques, the author finds empirical evidence for the hypothesis of a regime‐dependent government spending multiplier that falls as spending rises.