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International Monetary Fund. Western Hemisphere Dept.

create distortions without addressing the root causes of inflation. In the view of the mission, extensive wage indexation is a key reason why price shocks feed into wages and core inflation. Near-term fiscal policy could better support monetary policy. A neutral stance would in principle be appropriate given the cycle, but a stronger counter-cyclical stance should be considered to help monetary policy. While the larger deficit in 2012 is mostly on account of factors that do not imply fiscal impulse, there has also been a substantial increase in real spending. Slower

Jean-Marc Fournier, Takuma Hisanaga, and Anh D. M. Nguyen
This paper assesses Japan’s fiscal stance in the past and the future with a stochastic structural model called the Buffer-Stock Model of the Government. Our retrospective analysis suggests that the fiscal stance in the 1990s and the early 2000s was overall looser than the model recommendations. As for the future, the model advises the near-term fiscal policy to be supportive with a view to narrowing the output gap and minimizing hysteresis, while recommending a fiscal consolidation over the medium-term at a gradual pace.
International Monetary Fund. Asia and Pacific Dept

I Post-Pandemic Fiscal Policy: Implications from the Buffer-Stock Model of Government 1 Japan’s post-pandemic fiscal policy will face a difficult challenge. Premature fiscal support withdrawal would risk derailing the recovery, while the higher-than-ever public debt and demographic pressures point to a need for fiscal consolidation. To illustrate this trade-off, we tailor a stochastic structural model to the Japanese economy. The model suggests that, in the near term, fiscal policy should be supportive with a view to narrowing the output gap and minimizing