The Effect of Government Purchases on Economic Growth in Japan

We consider whether there is statistical evidence for a causal relationship between government expenditures and real GDP growth in postwar Japan. After studying the time-series properties of these variables, we find that government consumption and government investment both have a positive and causal effect on growth. This suggests that fiscal policy may not have been as ineffective during the last two decades of Japan’s stagnant growth as some have suggested, but may have helped to prevent an even more severe balance-sheet recession after the collapse of the Japanese bubble economy.