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

We estimate a medium-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 formulation of utilization following Greenwood, Hercowitz and Huffmann (1988), this paper succeeds in incorporating a negative correlation between capital utilization and rental costs to explain actual capital utilization rates. We find hump-shaped and persistent behavior of inflation rates in response to a monetary policy shock, which CEE cast doubt upon.