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

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.