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

Yasuharu Iwata

ESRI Discussion paper series from Economic and Social Research Institute (ESRI)

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.

Pages: 65 pages
Date: 2009-06
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Citations: View citations in EconPapers (38)

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