A situation where interest rates are lower than the economic growth rate, r < g, has begun to emerge in many developed countries, as in Japan. Recent studies and policymakers have begun to consider the possibility that this r < g economic phenomenon may make it unnecessary for governments to maintain fiscal discipline. We re-examine various monetary policies by a central bank including negative interest rate policy in the context of the fiscal sustainability.

We identify a situation where the BOJ's bond purchasing policy can be justified: the policy lowers nominal interest rate and even make it possibly negative and ease the fiscal burden. We also conrm that the conventional concern is applied: the BOJ is forced to help the fiscal authority, resulting in a huge inflation. We proceed by exploring these theoretical possibilities empirically. In particular, we thoroughly examine a recent study by Mian et al. (2022) which argues that Japan can significantly expand its fiscal stimulus without increasing taxes. We find that their results sensitively depend on their choices of various parameters. So, their policy recommendation needs to be taken with a grain of salt.