The empirical analysis of project effects of public works under deflation

Abstract

In this paper, a theoretical hypothesis that public works would have deterrence effects of deflation under the situation that deflation-gap exists was tested empirically. For testing this hypothesis empirically, we used macroeconomics data in Japan since 1991 when the huge deflation-gap was brought by the collapse of the babble economy. As a result, we found that 1,000 billions yen's public works increases the GDP deflator by 0.2-0.8 % and increases nominal GDP by about 2,430 billions yen-4,550 billions yen. This results support the hypothesis that public works would have deterrence effects of deflation under the situation that deflation-gap exists. It was also found that the deflation deterrence effects by the public works was larger than that by the increase export.