Secular Stagnation under the Fear of a Government Debt Disaster

No 17-012E, CIGS Working Paper Series from The Canon Institute for Global Studies

Abstract: By using a model incorporating the risk of an economic disaster triggered by the accumulation of government debt, we provide a new perspective to explain the driving forces behind a secular stagnation. According to the model, the fear of the imposition of a large-scale capital levy in the face of a disaster helps explain Japan's decades of persistent stagnation by almost one third. As government debt accumulates, not only the level but also the growth rate of output declines persistently, while the government bond yield is low. The model also shows that a permanent increase in consumption tax, which prevents a government debt disaster from occurring, increases social welfare. Finally, we discuss the plausibility of the expectations of the capital levy from the historical, theoretical, and political perspectives.

Pages: 34
Date: 2017-11
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