Analyses of Public Investment Shock in Japan: Factor Augmented Vector Autoregressive Approach

Takao Fujii, Kazuki Hiraga and Masafumi Kozuka
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Takao Fujii: Kobe University
Kazuki Hiraga: Keio University
Masafumi Kozuka: University of Marketing and Department Science

No 2012-006, Keio/Kyoto Joint Global COE Discussion Paper Series from Keio/Kyoto Joint Global COE Program

Abstract: In this study, we investigate the effect of a positive public investment shock on Japan's private consumption, real wages, and real effective exchange rate using a factor augmented vector autoregressive (FAVAR) model applied to a rich dataset. We demonstrate that private consumption increases, confirming previous literature involving structural VAR analysis of fiscal policy, but the real effective exchange rate appreciates. Our results resolve one of the two fiscal policy puzzles, which consist of qualitative different results among theory and empirical about private consumption and real effective exchange rate, discussed, and we explain them by using the new open economy macroeconomics model with rule of thumb consumers.

Pages: 16 pages
Date: 2012-06
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