## Fading Ricardian Equivalence in Ageing Japan

_IMF Working Papers, September 27, 2016_

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## Bibliographic details
- Authors: Ikuo Saito
- Published: September 27, 2016
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475541649.001

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### Executive summary
- Japan appears to be turning less Ricardian, and the trend is set to continue.
- Two main developments underpin this change:
  - The discount wedge seems to have risen, suggesting that consumers have become more myopic.
  - Some evidence points to the possibility that an increasing number of households are liquidity constrained.
- If these developments continue, the impact of fiscal policy on the economy will gradually rise.
- While a rising fiscal impact facilitates using fiscal policy to manage the economic cycle, it also calls for starting fiscal consolidation soon and in a gradual and steady manner, given the unsustainable public debt and the likely increasing challenges in funding the government's rising debt domestically.

### Key findings
- Discount wedge increase:
  - The discount wedge seems to have risen, implying greater consumer myopia.
- Liquidity constraints:
  - Evidence suggests an increasing number of households may be liquidity constrained.
- Fiscal multiplier implications:
  - A decline in Ricardian behavior would raise the effectiveness (impact) of fiscal policy over time.
- Fiscal sustainability concern:
  - Rising effectiveness of fiscal policy does not obviate the need for consolidation because public debt is characterized as unsustainable and domestic funding of rising debt will likely face increasing challenges.

### Policy recommendations
- Begin fiscal consolidation soon.
- Implement consolidation in a gradual and steady manner to manage risks associated with unsustainable public debt and potential funding challenges.
- Recognize that greater fiscal effectiveness can be used to manage the economic cycle, but it should not postpone consolidation efforts.

### Thematic tags (as presented)
- Aging
- Asset and liability management
- Consumption taxes
- Fiscal policy
- Liquidity
- Population and demographics
- Public debt
- Taxes

*Source: IMF Working Paper “Fading Ricardian Equivalence in Ageing Japan” by Ikuo Saito (September 27, 2016).*

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/fading-ricardian-equivalence-in-ageing-japan-44302_