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Policy Simulation of Government Expenditure and Taxation Based on the DSGE Model

Author

Listed:
  • Go Kotera

    (Former Economist, Policy Research Institute, Ministry of Finance)

  • Saisuke Sakai

    (Former Visiting Scholar, Policy Research Institute, Ministry of Finance)

Abstract
This study constructs a dynamic stochastic general equilibrium (DSGE) model including four types of government expenditure (merit goods, public goods, government investment, and lump-sum income transfers) and three types of tax (consumption tax, labor income tax, and capital income tax), and estimate the model parameters. We then perform a simulation analysis based on the estimation results. The estimates, using Japanese data from the first quarter of 1981 to the fourth quarter of 2012, suggest that Japanese government expenditure and effective tax rates do not significantly respond to changes in the output gap and cumulative debt. Furthermore, from a simulation analysis based on the estimation results, we draw two main findings. First, as to the differences in taxes used for financing government expenditure, while consumption tax and labor income tax are almost indifferent, capital income tax aggravates the economy in the long term. Second, when using the increased tax revenue derived from raising the consumption tax rate for additional government expenditure, expenditure on merit goods and government investment have positive effects on the economy in the short and long term, respectively.

Suggested Citation

  • Go Kotera & Saisuke Sakai, 2018. "Policy Simulation of Government Expenditure and Taxation Based on the DSGE Model," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 14(4), pages 613-640, July.
    • Handle: RePEc:mof:journl:ppr14_04_05
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    References listed on IDEAS

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    1. Lu, Zhenkun & Kameda, Keigo, 2024. "Impact of fiscal policies on the labor market with search friction: An estimated DSGE model for Japan," Journal of the Japanese and International Economies, Elsevier, vol. 72(C).

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    More about this item

    Keywords

    DSGE model; Bayesian estimation; fiscal policy; simulation analysis;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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