Policy Simulation of Government Expenditure and Taxation Based on the DSGE Model

Go Kotera and Saisuke Sakai
Additional contact information
Go Kotera: Former Economist, Policy Research Institute, Ministry of Finance
Saisuke Sakai: Former Visiting Scholar, Policy Research Institute, Ministry of Finance

Public Policy Review, 2018, vol. 14, issue 4, 613-640

Abstract: This study constructs a dynamic stochastic general equilibrium (DSGE) model including four types of government expenditure (merit goods, public goods, government investment, and lump-sum income transfers) and three types of tax (consumption tax, labor income tax, and capital income tax), and estimate the model parameters. We then perform a simulation analysis based on the estimation results. The estimates, using Japanese data from the first quarter of 1981 to the fourth quarter of 2012, suggest that Japanese government expenditure and effective tax rates do not significantly respond to changes in the output gap and cumulative debt. Furthermore, from a simulation analysis based on the estimation results, we draw two main findings. First, as to the differences in taxes used for financing government expenditure, while consumption tax and labor income tax are almost indifferent, capital income tax aggravates the economy in the long term. Second, when using the increased tax revenue derived from raising the consumption tax rate for additional government expenditure, expenditure on merit goods and government investment have positive effects on the economy in the short and long term, respectively.

Keywords: DSGE model; Bayesian estimation; fiscal policy; simulation analysis (search for similar items in EconPapers)
JEL-codes: C11 D58 E32 E62 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.mof.go.jp/english/pri/publication/pp_review/ppr14_04_05.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:mof:journl:ppr14_04_05

Access Statistics for this article

More articles in Public Policy Review from Policy Research Institute, Ministry of Finance Japan Contact information at EDIRC.
Bibliographic data for series maintained by Policy Research Institute ().