Discussion of “Expansionary Eﬀect of an Anticipated Fiscal Policy on
Consumption in Japan”
by Hiroshi Morita

November 2011

Tatsuyoshi Okimoto

GS of International Corporate Strategy (ICS)
Hitotsubashi University

Eﬀects of Fiscal Policy
1. Classic question in macroeconomics: How does the economy respond to a change in ﬁscal policy?
2. Two major approach(a) Narrative approach(b) VAR model approach
3. Narrative approaches(a) Ramey and Shapiro (1997), Edelberg, Eichenbaum, Fisher (1999,JET), Burnside, Eichenbaum, Fisher (2004, RED), Eichenbaumand Fisher (2005, JMCB)(b) Use speciﬁc events (e.g. war) to identify the ﬁscal policy shock(c) Fiscal policy shocks are identiﬁed relatively precisely(d) Can take into account the anticipated government spending(e) Small number of observations(f) Only consider positive ﬁscal policy shocks㻝4. VAR approach(a) Blanchard and Perotti (2002, QJE), Galı́, Lopez-Salido, and Valles(2007, JEEA), Perotti (2007, NBER Macro)(b) Use VAR (with Choleski decomposition) to identify ﬁscal policyshocks(c) Can use many observations(d) Both positive and negative shocks(e) Cannot take into account the anticipated nature of ﬁscal policy
5. Morita uses VAR approach but with identifying anticipated ﬁscal
policy shocks

㻞Anticipated policy
1. Why we should care anticipated policy?
2. Sims (1992, EER)(a) Analyze monetary policy eﬀects using VAR(b) Identify monetary policy shocks as an innovation in interest rate(c) Money supply and output respond negatively to monetary policy(d) Price puzzle: monetary tightening is associated with an increasein the price level(e) Can solve price puzzle by including commodity price(f) Interest rate innovations partially reﬂect inﬂationary pressurethat lead to price increases(g) Commodity price can capture additional information about future inﬂation(h) Important to include expectation variable to evaluate the policy
correctly
㻟3. Kuttner (2001, JME)(a) rt: fed fund target rate(b) ft: ﬀr implied by the front month fed fund futures contract(c) Decompose the monetary policy into two parts based on fed fundfutures
i. Unanticipated monetary policyΔrtu = ft − ft−1
ii. Anticipated monetary policy
Δrte = Δrt − Δrtu(d) Two regressions
i. ΔRt = α + βΔrt + εtii. ΔRt = α + β1Δrte + β2Δrtu + εt㻠Table 1
The 1-day response of interest rates to changes in the Fed funds targeta
Maturity

Intercept

ResponseR2

SEDW

3 month

@3.6
(2.3)
@5.2
(3.6)
@5.1
(3.3)
@5.2
(3.4)
@4.5
(2.9)
@4.0
(2.9)
@3.6
(3.2)

26.8
(5.4)
21.9
(4.6)
19.8
(4.1)
18.2
(3.7)
10.4
(2.1)
4.3(1.0)
0.1
(0.0)

0.42

9.8

2.04

0.37

9.0

2.04

0.29

9.5

2.07

0.26

9.6

2.28

0.10

9.8

2.40

0.02

8.5

2.50

0.00

6.9

2.47

6 month
12 month
2 year
5 year10 year
30 year

Note: The change in the target Fed funds rate is expressed in percent, and the interest ratechanges are expressed in basis points. The sample contains 42 changes in the target Fed funds ratefrom 6 June 1989 through 2 February 2000. Parentheses contain t-statistics.
a㻡Table 3
The 1-day response of interest rates to the Fed funds surprisesaResponse to target change
Maturity

Intercept

Anticipated

Unanticipated

R2SE

DW

3 month@0.7(0.5)@2.5(2.2)@2.2(1.8)@2.8(2.0)@2.4(1.6)@2.4(1.8)@2.5(2.2)

4.4(0.8)
0.6(0.1)@2.3(0.5)@0.4(0.1)@5.8(0.9)@7.4(1.3)@8.2(1.7)

79.1
(8.4)
71.6
(8.5)
71.6
(7.8)
61.4
(6.0)
48.1
(4.3)
31.5
(3.1)
19.4(2.3)

0.70

7.1

1.82

0.69

6.3

2.06

0.64

6.9

2.10

0.52

7.8

2.25

0.338.6

2.37

0.19

7.8

2.37

0.13

6.5

2.46

6 month
12 month
2 year
5 year10 year
30 year

Note: Anticipated and unanticipated changes in the Fed funds target are computed from theFed funds futures rates, as described in the text. Parentheses contain t-statistics. See also notes toTable 1.
a㻢(e) Interest rates respond positively to monetary policy change(f) Small response of interest rates to anticipated monetary policy(g) Interest rates’ response to unanticipated monetary policy is muchlarger(h) Important to distinguish between anticipated and unanticipatedpolicy(i) Too late to evaluate the policy when the actual policy was conducted(j) Should evaluate the policy when the market realizes it
4. Hamilton (2008, JME)(a) Examine the daily monetary policy eﬀects on the housing markets
using fed fund futures
5. Morita evaluates the ﬁscal policy using the market expectation

㻣Identiﬁcation of anticipated ﬁscal policy
1. Based on Fisher and Peters (2010, EJ)
2. Treat current and expected ﬁscal policy (public investment) shock
as exogenous
3. Positive anticipated ﬁscal policy shock will increase the future earnings of construction ﬁrms
4. Increase the current stock returns of construction industry
5. Use accumulated excess stock returns of construction industry
aert =t
j=1(rcj − rmj )(a) rcj : Stock return on construction industry(b) rmj : Stock return on whole market

㻤Contributions and main results
1. Examine the eﬀects of Japanese ﬁscal policy with taking into account the market expectation
2. Japanese ﬁscal policy stimulates GDP and consumption
3. Detect a decline in the eﬀects of ﬁscal policy recently
4. Develop and investigate the DSGE model to characterize the empirical ﬁndings
5. High elasticity of labor supply and a large share of Non-Ricardians
could be consistent with the empirical ﬁndings㻥Comments
1. Need more careful identiﬁcation of anticipated policy shocks(a) Why employ cumulative excess returns instead of excess returns?
(b) Using all construction ﬁrms could cause weak identiﬁcation(c) Fisher and Peters (2010)
i. Concentrate on the military related ﬁrms
ii. Ever ranked in the top 3 in value of primary contracts awarded
in a given year(d) Could use selected ﬁrms to obtain better identiﬁcationi. Large construction ﬁrms
ii. Local construction ﬁrms

㻝㻜㻝㻝

㻝㻞

2. Better check the validity of the sign restrictions(a) Uhlig’s (2005, JME) sign restriction is strong tool to identify theshocks(b) Easy to impose too much restrictions(c) Derive the sign restrictions from the DSGE model(d) Heavily depends on the model(e) Choice could be subjective(f) What if the sign restriction for GDP was dropped?
(g) How many samples were discarded?

㻝㻟Output

Aggregate Consumption

1Investment

03-0.220.5

1-0.4
00-0.551015-0.6-1-0.8-2

20

5Labor1015

20

Real Wage

5101520

Government Spending

1

100.5

-0.2
00.5
-0.4

-0.5

-0.6

-1-0.8
51015

20

05

1015

20

5

101520㻝㻠3. Examine possible structural change statistically(a) Timing of the structural change is determined with little justiﬁcationi. 1968Q1-1986Q4 Pre-bubble period
ii. 1987Q1-2009Q4: Post-bubble period?
(b) Conduct some tests for the structural change• Miyao (2000, JJIE)(c) Estimate Markov switching model• Fjiwara (2006, JJIE), Inoue and Okimoto (2008)㻝㻡4. Eﬀects of ﬁscal policy shocks could be unstable(a) Do not have anticipated ﬁscal policy shocks very often(b) Eﬀects could be smaller gradually(c) Fraction of Non-Ricardians could be time-varyingi. Ogawa (1990, JJIE)
ii. Business cycleiii. Interest rates
iv. Duration of unemployment
v. Aging society(d) Consider time-varying VAR model• Ko (2010)㻝㻢Conclusion
1. Interesting paper
2. Making good point with intriguing idea
3. Find reasonable results
4. Valuable contribution for the Japanese economic analysis
5. Need some robustness check about the identiﬁcation of ﬁscal policy
shocks
6. Would be more compelling by accommodating time-varying feature
7. Could be applied to many macroeconomic analysis

㻝㻣