Macroeconomic Effects of Consumption Tax in Japan : A SVAR Analysis

This study aims to examine the dynamic effects of the consumption tax on macroeconomic variables by employing a structural vector autoregressive (SVAR) model. Identification of shocks in the SVAR model is achieved by using a methodology proposed by Blanchard-Perotti (2002). The empirical results verify that a positive consumption tax shock has a negative effect on private consumption and GDP, but its effect is insignificant. By contrast, the positive consumption tax shock does not impact government consumption. On the other hand, a positive government consumption shock has a positive effect on private consumption, providing empirical evidence of the Edgeworth complementarity between government consumption and private consumption. GDP is also affected positively by the shock, which is consistent with Keynesian economic theory.