Fiscal Policy in an Estimated DSGE Model of the Japanese Economy

This paper studies how the \u85scal authoritys \u85nancing behavior a¤ects 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 con-sumption response regardless of its low share of non-Ricardian households. It points to the importance of the tax rule combination in determining \u85scal policy e¤ectiveness, which has been largely omitted in the literature. By conducting some policy experiments, I \u85nd that \u85scal policy becomes more e¤ective if its \u85nance 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 e¤ect on \u85scal multipliers. JEL classi\u85cation: E32, E62