Download Macroeconomic models in Japanese Government

Macroeconomic models in
Japanese Government
Masanori Umeda
(Economic and Social Research Institute , Cabinet office, Japan)
ESCAP Workshop on Macroeconomic Modelling in Asia and the Pacific
8 December,2015
Overview of macroeconomic models in Japan
 Two macroeconomic models are frequently used in
Japanese Government.
1. Short-run Macroeconometric model of the Japanese economy
 To evaluate effects of the economic policies and external shocks. ( not
designed for forecasting.)
 Published by the Economic and Social Research Institute(ESRI), Cabinet
Office, Japan.
2. Economic and fiscal model
 To describe the path of fiscal reconstruction.
 To show clear macroeconomic condition for the future (GDP, prices etc.)
and the macroeconomic vision that we should aim for.
 Published by the Cabinet Office, Japan
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Summary of macroeconomic models in Japan
 Short-run macroeconometric model of the Japanese economy
- this model is useful for understanding the economic basic structure and
the impact of economic policy and external shock.
 Economic and fiscal model
- this model includes national accounting identities in detail, for example
government budget, so this model is suitable for assessing process of
fiscal consolidation, reviewing economic and fiscal developments.
Short-run macroeconometric
models in Japnese economy
Economic and fiscal model
Simulation Term
Short
Medium to long
Frequency
Quarterly
Yearly
Equation
152
2,345
Output
multipliers, and economic
policy analyses
Economic and fiscal projections
(mid-long term forecast)
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Historical background (１)
“Short-run macroeconometric model of the Japanese
economy” is based on IS-LM-BP framework.
Traditional Keynesian macro model made a important
role in the government and central bank for their policy
making from 1940s.
In recent years, due to the progress of microfoundation
of macroeconomics, the discussion of conventional
macroeconometric models have declined in
academia.
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Historical background (２)
After seminal critics by Lucas (1976) and by Sims (1980) on
traditional macroeconometric models, DSGE and VAR
models have been developed and widely used as
substitutes for the traditional models.
However, those substitute models still have several
problems to overcome for practical use in economic
policy analyses.
ESRI has been developing and utilizing multiple types of
models, including DSGE, as well as traditional models.
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Historical background (３)
Japanese government adopts hybrid-model which
pursue short-run empirical coherence and long-run
consistency,and DSGE models, which place greater
emphasis on theory.
“Short-run macroeconometric model of the
Japanese economy” and “Economic and fiscal
model” is classified to Hybrid model.
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The structure of “the short-run macroeconometric
model of the Japanese Economy”
This model is basically a demand-oriented, traditional
Keynesian model with IS-LM-BP framework; however it
adopts recent developments in econometrics such as
co-integration and error correction to ensure long-run
properties of models.
This model is composed of 152 equations (includes 47
estimated equation).
This model is mainly composed of 4 blocks.
(1) Goods and Services market
(3) Money market
(2) Labor market
(4) Foreign exchange market.
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(1) Goods and services ①
Demand Side Y=C+I+G+X-M (IS Curve)
(Private Consumption) C = C(NW, YD, r)
 Based on permanent income hypothesis.
 In the short term, private consumption is affected by disposable
income.
 In the long term, private consumption is affected by lifetime
income.
(Investment) IP = IP(KP/KPeq, UC/P, PS, X)
 Based on the Capital Stock Adjustment Principle.
 Capital stock is gradually adjusted to the equilibrium capital stock
level.
 In the short-run, GDP depends on demand side:this
relation composes IS curve.
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(1) Goods and services ②
Supply Side
Yp=F(KP,Ls)
dp/P=P((dP/P)-1, GAP)
GAP=Y/Yp
 Potential GDP is defined by the factors of production(labor
supply, capital stock, etc)
 In the long-run, operating ratio converges to equilibrium
operating ratio by the adjustment mechanism,where
GDPGAP affects prices by modified Phillips curve.
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(2) Labor Market
Labor demand is determined by the long-run inverse
correlation between in the real GDP growth rate and
the unemployment rate (Okun's law).
Wages are determined by the adjustment of the
labor share of the economy.
Ld＝ Ld （１－UR）
UR＝（(UR/Ureq)-1,CU,UR-1, (YW/NI)/(YW/NI)eq )
Labor supply depends on the real wages,
population and aging rate.
Ls＝ Ls（W/P, POP65／POP, UR）
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(3) Money Market
 Short-term interest rates is based on Taylor rule(adjustment
by GDPGAP and Inflation).
is= is(dP/p,GAP,Yp)
 If Taylor rule suggests negative value, interest-rate would be fixed to 0.01%.
 Money Supply is endogenously determined by the function
of money demand.
MS=MD(is,Y,P)
 Long-term interest rates is determined by period structure of
short-term interest rates.
il= is(L)
r= il -dP/p
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(4) Foreign exchange Market
 Foreign exchange rate is determined based on “Asset Approach”.
 Foreign exchange rates is determined by equilibrium rate, interest
rate gap between Japan and the U.S and risk premium.
 Import price, net export and net factor income is effected by
exchange rate. Current account balance is determined by these
factor.
 Capital account balance is defined by BP Curve(balance of
payments curve) .
E=E(il-il*, P/P*, ρ）
ρ=Σ BC/(P・Y)
BC=P・X – E・P*・M
BC ＋ BK＝０ (BP Curve)
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The cases of Simulation
1. Government investments
 Effect of real government investments (1% of real GDP)
 Effect of real government investments (1% of real GDP) 【fixed short-term interest rate】
 Effect of nominal government investmets （1% of nominal GDP）
2. Income-tax reduction
 Effect of income-tax reduction (1％ of nominal GDP)
3. Consumption-tax increase
 Effect of the consumption-tax rate rise (1％point)
4. Monetary policy
 Effect of short-term interest rates rise(1%pt)
 Effect of 1% of Money supply increase
5. External shocks
 Effect of 10% devaluation in exchange rate
 Effect of oil price hike by 20%
 Effect of world demand increase by 1%
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Main result
(Short-run macroeconometric model)
 Here are some of the multipliers of policy simulations. The fiscal
multiplier, i.e., the effect of government investments on GDP, is
1.14 in the first year.
 The effect of income tax reduction is smaller than that of the
fiscal expenditures due to its leak to household savings. 1%
point rise of short-term interest rate reduces real GDP by 0.32%
in the first year.
Effects of Macroeconomic Policies in Japan on Real GDP
Effect of
Government
Investments
(１% of Real GDP)
1st Year
2nd Year
3rd Year
1.14
1.02
0.97
(% deviation)
Effect of Income-Tax Effects of Short-term
Effects of
Reduction
Interest Rate Rise
Depreciation of the
(１% of Nominal
(１% point)
exchange rate
(10% )
GDP)
0.30
0.37
0.45
-0.32
-0.26
-0.29
0.08
0.44
0.41
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Dataset and Software Platform
(Dataset)
 Quarterly data.
 Estimation period is FY1980 to FY2012.
 The dataset is composed of macroeconomic time series
data such as SNA(System of National Account).
(Software Platform)
 Software is “Portable Troll Release2.6”
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The characteristics of “Economic and Fiscal model”
 “Economic and fiscal model” interacts macroeconomy and
public finance and social security synthetically.
 The projection based on this model is published twice a year.
 To describe the path of fiscal reconstruction.
 To show clear macroeconomic condition for the future(GDP,
prices etc.) and the macroeconomic vision that we should aim
for.
 The latest projection (“Economic and Fiscal Projections for Medium to Long
Term Analysis”) was published in July ,2015.
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Macroeconomic vision in Japan
The aiming for the macroeconomic perspectives
(Medium to long term)
Around 3％ nominal gross domestic product (GDP) growth
and around 2％ real GDP growth, on average, over the
next ten years.
The target of the fiscal consolidation
1. Halving the rate of the fiscal deficit against GDP by
FY2015 (▲6.6%→▲3.3％）
2. Turning the fiscal deficit to a surplus by 2020.
3. Reduce the debt-to-GDP ratio in a stable manner.
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Main result (1)(economic and fiscal model)
 The target of halving the ratio of deficit to GDP from the FY2010 rate
by FY2015(3.3% to GDP) is expected to be achieved.
 In the Economic Revitalization Case, the primary deficit is projected to
be approximately 1.7% in FY 2018 and 1.0% in FY2020.
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Main result (2)(economic and fiscal model)
 In the Baseline Case, the ratio of outstanding debt to GDP in FY2020
(excluding the reconstruction bonds) is projected to be
approximately198.8% and to increase afterwards.
 In the Economic Revitalization case, the ratio of debt to GDP is
projected to be approximately 184.2% and to decline afterwards.
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