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

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  • IWATA Yasuharu

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.

Suggested Citation

  • IWATA Yasuharu, 2009. "Fiscal Policy in an Estimated DSGE Model of the Japanese Economy: Do Non-Ricardian Households Explain All?," ESRI Discussion paper series 216, Economic and Social Research Institute (ESRI).
  • Handle: RePEc:esj:esridp:216
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