An Estimated Dynamic Stochastic General Equilibrium Model of the Japanese Economy: A Bayesian Analysis

This paper estimates a dynamic stochastic general quilibrium (DSGE) model for the Japanese economy over 1970:Q1 through 1998:Q4, which is prior to the period of zero interest rate bound. More specifically, the New-Keynesian DSGE model with several frictions such as stickiness in price and wage, habit formation and adjustment cost in investment, developed by Christiano, Eichenbaum and Evans (CEE, 2005), is estimated using Bayesian inference via Markov-chain Monte Carlo (MCMC) simulation. The parameters and impulse response functions of nine shocks such as monetary policy shock and productivity shock are estimated to be quite consistent with those in the previous studies such as Onatski and Williams (2004) and Levin et al. (2005) for the U.S. and Smets and Wouters (2003) for the euro area. For example, the Japanese monetary authorities are found to have reacted very actively toward inflation. The only exception is investment, whose adjustment cost is estimated huge and whose shock is estimated to give long-lasting effects on output and consumption compared with those in the previous studies for the U.S. and euro area. Meanwhile, variance decomposition shows productivity shock and investment shock account for a large fraction of output fluctuation in long run in contrast to Smets and Wouters (2003).