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ESRI Discussion Paper Series No.216

Fiscal Policy in an Estimated DSGE Model of the Japanese Economy:
Do Non-Ricardian Households Explain All?

Yasuharu Iwata
Deputy Director, Administration Div., Economic and Social Research Institute, Cabinet Office
Abstract

This paper studies how the fiscal authority's financing behavior affects dynamic responses to a government spending shock using an estimated medium-scale dynamic stochastic general equilibrium (DSGE) model of the Japanese economy. The estimated model successfully delivers a positive consumption response regardless of its low share of non-Ricardian households. It points to the importance of the tax rule combination in determining fiscal policy effectiveness, which has been largely omitted in the literature. By conducting some policy experiments, I find that fiscal policy becomes more effective if its finance is allocated lightly on labor-dampening taxes. I also show that a choice of tax rule combination can actually dominate the non-Ricardian share in its effect on fiscal multipliers.


Structure of the whole text(PDF-Format 2File)
full text (276KB)
1.  Introduction ----------------------------------------------------------------------------- 2  
2.  The Model ------------------------------------------------------------------------------ 7  
   2.1 Households ------------------------------------------------------------------------- 7  
   2.2 Firms ------------------------------------------------------------------------------- 11  
   2.3 Fiscal and Monetary Authorities----------------------------------------------------- 13  
   2.4 Aggregation and Market Clearing---------------------------------------------------- 15  
3.  Bayesian Estimation of the Model-------------------------------------------------------- 16  
   3.1  Preliminary Setting ----------------------------------------------------------------- 16  
   3.2  Estimation Results ----------------------------------------------------------------- 17  
4.   Assessing the Role of Tax Policy Rules------------------------------------------------- 19  
   4.1  Responses to a Government Spending Shock --------------------------------------- 19  
   4.2   Policy Experiments ---------------------------------------------------------------- 22  
5.  Concluding Remarks------------------------------------------------------------------- 26  
References --------------------------------------------------------------------------------- 28  
Appendix ---------------------------------------------------------------------------------- 34 (399KB)
   A Data sources------------------------------------------------------------------------- 34  
   B Log-linearized Model----------------------------------------------------------------- 36  
 

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