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Estimating a DSGE Model for Japan:

Evaluating and Modifying a CEE/SW/LOWW Model

February 2007
Tomohiro Sugo*1
Kozo Ueda*2

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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.

JEL Classification: E22, E32, E52

DSGE model, monetary policy, capital utilization, Japan

We would like to thank Toni Braun, Ippei Fujiwara, Shin-ichi Fukuda, Koichiro Kamada, Andrew Levin, Kenji Nishizaki, Frank Smets, Hiroshi Ugai, Toshiaki Watanabe, Tomoo Yoshida, and many other seminar participants at the Research and Statistics Department and the University of Tokyo for very helpful comments. We are also grateful to Michel Juillard, John Williams, Noah Williams, and Raf Wouters for providing us with computer programs and answering a number of questions. The views expressed here are those of the authors and do not reflect those of the Bank of Japan.

  • *1 Monetary Affairs Department, Bank of Japan
  • *2 Monetary Affairs Department, Bank of Japan


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