Regional income disparity and fiscal-monetary policy

Abstract

In this paper, first we present an interregional macroeconomic model of Japanese economy. Then, using the model, we examine how macro-stabilization policies affect regional income disparities. We show that according to our model, the regional income disparity becomes smaller both in the case of recession combined with balance of payments surplus under a fixed exchange rate regime, and in the case of recession combined with a strong Japanese Yen under a flexible exchange rate regime. Conversely, it becomes larger both in the case of expansion combined with balance of payments deficit under a fixed exchange rate regime, and in the case of expansion combined with a weak Japanese Yen under a flexible exchange rate regime. We also show that the results of our analyses are consistent with Japanese experiences during the last three decades.