A DSGE Model with Endogenous Economic Growth and Fiscal Expenditure

To build a DSGE model, we introduce a mechanism that endogenously determines economic growth based on human capital accumulation theory. We also introduce a mechanism that endogenously determines fiscal expenditure by adding the price for public goods provided by the government. Additionally, economic growth and fiscal expenditure can be solved flexibly. In the matter of estimating a DSGE model, we propose three principles: estimate most of the parameters by Bayes estimation, adjust the Bayes estimation over and over again based on the difference between the posterior distribution and the prior distribution of each parameter, and assess the goodness of the model in matching the real economic data by employing an index , which is similar to R2 in econometrics. By complying with the principles above, we obtain three estimated models that closely fit the real economic data of China, the USA and Japan, and almost all of six observable variables for each of the three countries exceed 0.95. Moreover, all three estimated models can accurately predict the economic growth of the three countries respectively. Finally, we summarize the long-term and short-term economic characteristics of the three countries based on the estimated models