Public investment and regional business cycle fluctuations in Japan

ABSTRACT

This article examines the relationship between public investment and regional business cycle fluctuations in Japan. In particular, we focus on the effects of ‘discretionary’ changes in public investment, a portion of investment unrelated to the current state of macroeconomic circumstances. The empirical results show that such portions of public investment amplify regional business cycle fluctuations.

JEL CLASSIFICATION:

• E32
• E62
• H30
• H54
• R11

KEYWORDS:

• Regional public investment
• ‘Discretionary’ changes in public expenditures
• fiscal policy volatility
• business cycle fluctuation

Acknowledgements

The author thanks Nobuo Akai, Kazumi Asako, Thiess Büettner, Shun-ichiro Bessho, Takero Doi, Masayoshi Hayashi, Shafik Hebous, Midori Hirokawa, Toshihiro Ihori, Keigo Kameda, Ryuta Rei Kato, Vassilis Logothetis, Tomoya Mori, Tsukasa Matsuura, Sei-l Mun, Junichi Nakamura, Yukihiro Nishimura, Stuart Rosenthal, Hirokazu Takizawa, Hiroki Tanaka, Akiko Tamura, and Ichihiro Uchida for their insightful comments and suggestions. The participants of the Conference of the Korean Association of Public Finance and the seminars at Hosei University, Hitotsubashi University, Chuo University, U.C. Irvine, and Kyoto University are also acknowledged for their useful comments.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ There are 11 comparable sectors: agriculture, forestry and fisheries, mining, manufacturing, construction, utilities, wholesale trade, finance and insurance, real estate, transportation and communications, and services.

² For the details on estimation, please see the discussion paper version of this article downloadable from the author’s website: https://sites.google.com/site/tomomisite/research/dp

³ Since this proportion is mostly unchanged through the sample period, we use the value in 2007, which is the latest data period in our sample.

⁴ For Aichi prefecture, the exports expressed in real terms are not from the Annual Report on Prefectural Accounts. These variables are downloaded from the official website of the Aichi prefectural government. Incidentally, to express in real terms, we use the deflator of RGDP in Aichi prefecture because we cannot acquire the deflator of exports of Aichi.

⁵ For details on the data, please see the data appendix of the discussion paper version of this article.

⁶ Please see the discussion paper version of the article for the estimation results of Equation (1). Incidentally, we confirm the correlation between two endogenous variables, ${\sigma }_i^{\epsilon }$and government size, and the instrumental variables in the 2SLS estimation. We confirm that correlations between ${\sigma }_i^{\epsilon }$ and the instrumental variables are strong. For more details, please also see the discussion paper version of this article.

Additional information

Funding

This work was supported by the Japan Society for the Promotion of Science, grant-in-aid for scientific research [grant number 26380361] and from the Japan Legal System Association.