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

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  • Takao Fujii

    (Kobe University)

  • Kazuki Hiraga

    (Keio University)

  • Masafumi Kozuka

    (University of Marketing and Department Science)

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    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.

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    Bibliographic Info

    Paper provided by Keio/Kyoto Joint Global COE Program in its series Keio/Kyoto Joint Global COE Discussion Paper Series with number 2012-006.

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    Length: 16 pages
    Date of creation: Jun 2012
    Date of revision:
    Handle: RePEc:kei:dpaper:2012-006

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    Phone: 81-3-3453-4511
    Web page: http://ies.keio.ac.jp/old_project/old/gcoe-econbus/
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    2. Laganà, Gianluca & Sgro, Pasquale Michael, 2011. "A factor-augmented VAR approach: The effect of a rise in the US personal income tax rate on the US and Canada," Economic Modelling, Elsevier, vol. 28(3), pages 1163-1169, May.
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