Public investment, economic stabilization, and regionally discordant business cycles in Japan: Toward an effective fiscal stimulus

This paper examines the cyclicality of Japanese public investment for the prefectural-level business cycles as well as for the aggregate ones. We estimate the public investment reaction function, in which regional business cycles are explicitly discriminated from national business fluctuations using both the aggregate time series data and prefectural panel data during the 1990s. We uncover a particular public investment inclination such that policymakers tend to pay attention only to the macroeconomic variables, whereas they disregard individual situations of the regional economies. This means that there is room for policymakers to stabilize the regional business cycles, while attaining the resultant macroeconomic stabilization as well.