Why has Fiscal Policy Disappointed in Japan? - Revisiting the Pre-Keynesian View on the Ineffectiveness of Fiscal Policy

Fiscal policy has been of significant size in Japan since the early 1990s, propelling Japan to the forefront of fiscally-challenged nations. However, the effect of fiscal policy has been disappointing. This paper discusses the various explanations provided by the literature (the argument that fiscal policy was effective; the argument that it was not effective, because of interest rate-based crowding out; and the argument that it was not effective, because of Ricardian equivalence). Their empirical record is evaluated and found to be less than convincing. The paper then discusses an alternative explanation, which is derived from pre-Keynesian views on the effectiveness of fiscal policy. A modified Fisher-equation is proposed, which synthesizes aspects of the early monetarist model with the recent findings in the credit view literature. The alternative explanation is subjected to empirical tests and found supported. Policy implications are discussed, especially ways in which the Japanese government could render fiscal policy more effective.