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

  • Takao Fujii

    (Kobe University)

  • Kazuki Hiraga

    (Keio University)

  • Masafumi Kozuka

    (University of Marketing and Department Science)

Registered author(s):

    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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    File URL: http://ies.keio.ac.jp/old_project/old/gcoe-econbus/pdf/dp/DP2012-006.pdf
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    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
    Contact details of provider: Postal: 2-15-45, Mita, Minato-ku, Tokyo 108-8345
    Phone: 81-3-3453-4511
    Web page: http://ies.keio.ac.jp/old_project/old/gcoe-econbus/

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    1. Andrew Mountford & Harald Uhlig, 2008. "What are the Effects of Fiscal Policy Shocks?," NBER Working Papers 14551, National Bureau of Economic Research, Inc.
    2. Fukuda, Shin-ichi & Yamada, Junji, 2011. "Stock price targeting and fiscal deficit in Japan: Why did the fiscal deficit increase during Japan’s lost decades?," Journal of the Japanese and International Economies, Elsevier, vol. 25(4), pages 447-464.
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    4. Rangan Gupta & Alain Kabundi & Emmanuel Ziramba, 2010. "The Effect Of Defense Spending On Us Output: A Factor Augmented Vector Autoregression (Favar) Approach," Defence and Peace Economics, Taylor & Francis Journals, vol. 21(2), pages 135-147.
    5. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization Of The Dynamic Effects Of Changes In Government Spending And Taxes On Output," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1329-1368, November.
    6. Ludger Linnemann & Andreas Schabert, 2006. "Productive Government Expenditure In Monetary Business Cycle Models," Scottish Journal of Political Economy, Scottish Economic Society, vol. 53(1), pages 28-46, 02.
    7. Kim, Soyoung & Roubini, Nouriel, 2008. "Twin deficit or twin divergence? Fiscal policy, current account, and real exchange rate in the U.S," Journal of International Economics, Elsevier, vol. 74(2), pages 362-383, March.
    8. Lawrence J. Christiano & Martin Eichenbaum & Sergio Rebelo, 2010. "When is the government spending multiplier large?," CQER Working Paper 2010-01, Federal Reserve Bank of Atlanta.
    9. Tommaso Monacelli & Roberto Perotti, 2010. "Fiscal Policy, the Real Exchange Rate and Traded Goods," Economic Journal, Royal Economic Society, vol. 120(544), pages 437-461, 05.
    10. King, R.G. & Baxter, M., 1990. "Fiscal Policy In General Equilibrium," RCER Working Papers 244, University of Rochester - Center for Economic Research (RCER).
    11. 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.
    12. Jordi Galí & J. David López Salido & Javier Vallés, 2003. "Understanding the effects of government spending on consumption," Banco de Espa�a Working Papers 0321, Banco de Espa�a.
    13. Florin O. Bilbiie, 2009. "Nonseparable Preferences, Fiscal Policy Puzzles, and Inferior Goods," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(2-3), pages 443-450, 03.
    14. Christopher Erceg & Luca Guerrieri, 2005. "Expansionary Fiscal Shocks and the Trade Deficit," Computing in Economics and Finance 2005 128, Society for Computational Economics.
    15. Florin O. Bilbiie, 2011. "Nonseparable Preferences, Frisch Labor Supply, and the Consumption Multiplier of Government Spending: One Solution to a Fiscal Policy Puzzle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(1), pages 221-251, 02.
    16. Nooman Rebei & Hafedh Bouakez, 2004. "Why Does Private Consumption Rise After a Government Spending Shock?," Computing in Economics and Finance 2004 20, Society for Computational Economics.
    17. Forni, Mario & Gambetti, Luca, 2010. "Fiscal Foresight and the Effects of Goverment Spending," CEPR Discussion Papers 7840, C.E.P.R. Discussion Papers.
    18. Masahiko Shibamoto, 2007. "An Analysis Of Monetary Policy Shocks In Japan: A Factor Augmented Vector Autoregressive Approach," The Japanese Economic Review, Japanese Economic Association, vol. 58(4), pages 484-503.
    19. Carlos Vargas-Silva, 2008. "The effect of monetary policy on housing: a factor-augmented vector autoregression (FAVAR) approach," Applied Economics Letters, Taylor & Francis Journals, vol. 15(10), pages 749-752.
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    21. Christopher J. Erceg & Luca Guerrieri & Christopher Gust, 2005. "Expansionary Fiscal Shocks and the US Trade Deficit," International Finance, Wiley Blackwell, vol. 8(3), pages 363-397, December.
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