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ISRN Economics
Volume 2013 (2013), Article ID 825862, 9 pages
http://dx.doi.org/10.1155/2013/825862
Research Article

Constructing a Small-Region DSGE Model

School of Commerce, Meiji University, 1-1 Kanda-Surugadai, Chiyoda-ku, Tokyo 101-8301, Japan

Received 8 January 2013; Accepted 3 February 2013

Academic Editors: B. Junquera, M. E. Kandil, A. Rodriguez-Alvarez, M. Tsionas, and A. Watts

Copyright © 2013 Kenichi Tamegawa. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

This paper constructs a tractable dynamic stochastic general equilibrium (DSGE) model of a regional economy that is considered small because it does not affect its national economy. To examine properties of our small-region DSGE model, we conduct several numerical simulations. Notably, fiscal expansion in our model is larger than that in standard DSGE models. This is because the increase in regional output does not raise interest rates, and this leads to the crowding-in effects of investment.