Effects of Fiscal Policy on the Credit Market: Evidence in Japan using a Cointegration Analysis

Using a set of cointegration and error correction models with Threshold Autoregressive (TAR) or Momentum Threshold Autoregressive (MTAR) asymmetric adjustment, we investigate whether the effects of fiscal policy (i.e. expansionary or contractionary government spending shocks) on interest rates in Japan are asymmetric or not. Forty years of quarterly series on price of oil, Consumer Price Index (CPI) used to compute the real price of oil, Government spending (nominal value of Federal Government spending of goods and services for consumption and investment) and interest rate (Three-month Treasury Bill Rate) obtained from the International Monetary Fund’s International Financial Statistics CD-ROM were used for the different tests. Empirical results show that the effects of fiscal policy on interest rates are asymmetric in Japan. Furthermore, the impulse response functions indicate that the results are consistent with a dynamic asymmetry in the behavior of fiscal policy movements.