This paper extends the supply side argument of the Domar model for fiscal sustainability and examines the case of the bond market in People’s Republic of China.
Public debt sustainability depends on interest rate sensitivity to changes in government bond supply and demand.
Population aging diminishes the effectiveness of monetary policy and weakens the fiscal stimulus.
As retirees make up more and more of the population, fiscal and monetary policies become less effective.
Structural reform, not monetary policy, is key to lifting Japan out of long-term recession.