Estimating a DSGE Model for Japan: Evaluating and Modifying a CEE/SW/LOWW Model

We estimate a middle-scale DSGE model of the Japanese economy following Christiano, Eichenbaum and Evans (2005), Smets and Wouters (2003) and Levin et al. (2005). By using actual capital utilization data and modifying the formalization of utilization following Greenwood et al. (1988), this paper succeeds in incorporating a negative correlation between capital utilization and rental costs to explain actual capital utilization rates. We nd that Japanese business cycles are driven largely by an investment adjustment cost shock in the short run while a productivity shock is a dominant driving force in the long run. We also nd a hump-shaped and persistent behavior of in ation rates in response to a monetary policy shock, which CEE doubt about