Assessing the Effects of Fiscal Policy in Japan with Estimated and Calibrated DSGE Models

In this paper, we assess the effects of fiscal policy in Japan using two dynamic stochastic general equilibrium (DSGE) models. One is a medium-scale DSGE model of Japan's economy ("M-JEM," Fueki et al., 2010) estimated using Bayesian techniques. The other is the IMF's multi-region "GIMF (Global Integrated Monetary and Fiscal)" model (Kumhof et al., 2010) calibrated to data for Japan and other countries. The government consumption multiplier calculated from the former model is larger than that from the latter, mainly because the negative effects of the resulting increase in the interest rate are larger in the latter model. In both models, however, the effect of a positive government consumption shock on real GDP becomes substantially smaller when the government targets a fiscal surplus by raising tax rates. The effectiveness of endogenous adjustment of the tax policy in response to non-fiscal shocks is not so much different between the two models and is not much affected by changes in the interest rate.