Download Workings of A Public Money System of Open Macroeconomies

Workings of A Public Money System
of Open Macroeconomies
– Modeling the American Monetary Act Completed –
(A Revised Version)
Kaoru Yamaguchi
∗
Doshisha University
Kyoto 602-8580, Japan
E-mail: [email protected]
Abstract
Being intensified by the recent financial crisis in 2008, debt crises seem
to be looming ahead among many OECD countries due to the runaway
accumulation of government debts. This paper first explores them as a
systemic failure of the current debt money system. Secondly, with an
introduction of open macroeconomies, it examines how the current system can cope with the liquidation of government debt, and obtains that
the liquidation of debts triggers recessions, unemployment and foreign
economic recessions contagiously. Thirdly, it explores the workings of a
public money system proposed by the American Monetary Act and finds
that the liquidation under this alternative system can be put into effect
without causing recessions, unemployment and inflation as well as foreign recessions. Finally, public money policies that incorporate balancing
feedback loops such as anti-recession and anti-inflation are introduced for
curbing GDP gap and inflation. They are posed to be simpler and more
effective than the complicated Keynesian policies.
1
Introduction: Public vs Debt Money
I have explored in the paper [16]1 how accumulating government debts could
be liquidated under two different macroeconomic systems; that is, a current
∗ The original paper was presented at the 29th International Conference of the System
Dynamics Society, Washington D.C., USA, July 25, 2011. On the following day, July 26, it
was presented at the US Congressional Briefing, Cannon 402, sponsored by the Congressman
Dennis Kucinich. Then, it is moderately revised by adding comparative analyses of liquidation
policies under a debt money system, and presented with the same title at the 7th Annual AMI
Monetary Reform Conference in Chicago, USA, Sept. 30, 2011.
1 With its modest revision, the paper was presented at the monetary reform conf. in
Chicago, organized by the American Monetary Institute, on Oct. 1, 2010, for which the
1
macroeconomic system of money as debt, and a debt-free macroeconomic system
advocated by the American Monetary Act. What I have found is that the
liquidation of government debt under the current macroeconomic system of
money as debt is very costly; that is, it triggers economic recessions, while
the liquidation process under a debt-free money system can be accomplished
without causing recessions and inflations. The results are, however, obtained in
a simplified closed macroeconomic system in which no labor market exists.
Accordingly, the purpose of this paper is to expand the previous simple
macroeconomic system to complete open macroeconomies in which labor market and foreign exchange market exist, and analyze if similar results could be
obtained in the open macroeconomies for a system of money as debt and a
debt-free money system. For the examination, I have felt a strong necessity
to briefly redefine money and its system in this introductory section to avoid
further confusions caused by different usage of terminologies. In the previous
paper, a system of money as debt was used to describe the current monetary
system, and a debt-free money system was used as a system that is proposed by
the American Monetary Act. Let us redefine these terminologies in a uniform
fashion as follows.
Public Money
From early days in history money has been in circulation as a legal tender as
Aristotle (384-322 BC) phrased that “Money exists not by nature but by law
[17].” Hence, money has been by definition a fiat money as legal tender. Money
thus created, whether it could be tangible or intangible, has to have the following
three features as explained by many economics textbooks.
• Medium of Exchange
• Unit of Account
• Store of Value
Using system dynamics concept of stock and flow, these
functions of money may be
uniformly illustrated in Figure
1 in which flows of money such
as receipts and payments accomplish counter-transactions
of sales and purchases of commodity (means of exchange)
according to a uniform scale
(unit of account), and the
Money
Payments
Receipts
Commodity
Sales
Purchases
Figure 1: Public Money
following award was given; “Advancement of Monetary Science and Reform Award to Prof.
Kaoru Yamaguchi, Kyoto, Japan, For his advanced work in modeling the effects on national
debt of the American Monetary Act”.
2
Non-metal
Commodities
Metal
Coinage
Paper
Notes
Intangible
Numbers
Digits
Fiat Money as Legal Tender
Public Money
Debt Money
Shell, Cloth (Silk)
Woods, Stones, etc
Non-precious Metals
Copper, Silver, Gold
Sovereign Notes
Gold(smith) Certificates
Government Notes
(Central)Bank Notes
Deposits
(Credit by Loan)
Electronic Substitutes Electronic Substitutes
Table 1: Public vs Debt Money
amount of money thus circulated is stored as a stock of money as a result
of these transactions (store of value). In system dynamics stocks of money and
commodity can be said to co-flow all the time in an opposite direction.
Money, having the above three features as a legal tender, could take a form
of commodities such as shell, silk (cloth) and stone, of precious metals such as
copper, silver and gold, of paper such as Goldsmith and gold certificates and
bank notes, and of intangible numbers and electronic digits such as deposits
and credits. In short, any form that performs three features has been generally
accepted as money that has a purchasing power.
Among these various forms of money, let us define public money here as the
one that is a fiat money of legal tender and issued only by the government and
sovereignty as public utility for transactions. Examples of public money are
summarized in Table 1.
Debt Money
Tangible money currently in use are coinage and bank notes. Coins are minted
by the government as subsidiary currency. Hence, it is public money by definition. On the other hand, bank notes are issued by central banks that are
independent of the government and privately owned in many countries. For instance, Federal Reserve System, the central bank in the United States, is 100%
privately owned [2] and Bank of Japan is 45% privately owned. Hence, governments are obliged to borrow from central banks and in this sense bank notes
are regarded as a part of debt money.
Theoretically, the issuance of money by the private organizations can be possible only when government or sovereignty legally allow them to create money,
since “money exists by law” as pointed out above. Historically this occurred
when Bank of England was founded in 1694 and endowed with the right to issue money as its bank notes. In the United States, this was instituted by the
Federal Reserve Act in 1913.
In addition to the tangible money such as bank notes and coinage, bank
3
deposits or credits created as loans by commercial banks also play a role of
money, though intangible, because they can be withdrawn any time, at request,
for transactions. This process of credit creation is made possible by the so-called
a fractional reserve banking system. For detailed analysis see [10].
In sum, under the current financial system, currency in circulation such as
bank notes and coinage and bank deposits play a role of money. The amount
of money that is available at a certain point of time is called money supply or
stock, which is thus defined as
Money Supply = Currency in Circulation + Deposits
(1)
In system dynamics terMoney Supply
minology, it is nothing but
Money
a money stock as illus(Currency in
Circulation)
trated in Figure 2. To disLoan
tinguish this type of money
Receipts (MS)
Payments (MS)
from public money, let us
Deposits
call it debt money, because money of this type
is only created when government and commercial
Commodity
Purchases
banks come to borrow
Sales
from central banks (highpowered money), and proFigure 2: Debt Money
ducers and consumers come
to borrow from commercial banks (bank deposits and credits are called lowpowered money). In my previous paper [16], this system is called system of
money as debt. Almost all of macroeconomic textbooks in use such as [4], [5],
[6], [3] justify the current macroeconomic system of debt money without mentioning an alternative system, if any, such as the money system proposed by the
American Monetary Act to be explained below.
The American Monetary Act
After the Great Depression in 1929, two banking reforms were proposed to avoid
further serious recessions; that is, the Banking Act of 1933 known as the GlassSteagall Act and the Chicago Plan. The Glass-Steagall Act was intended to separate banking activities between Wall Street investment banks and depository
banks. The act was unfortunately repealed in 1999 by the Gramm-Leach-Bliley
Act. This repeal was criticized as having triggered the recent financial crisis of
subprime mortgage loans, following the collapse of Lehman Brothers in 2008.
On-going movement of financial reforms in the US is an attempt to bring back
stricter banking regulations in the spirit of the Glass-Steagal Act.
The other reform was simultaneously proclaimed by the great economists in
1930s such as Henry Simons and Paul Douglas of Chicago, Irving Fisher of Yale,
Frank Graham and Charles Whittlesley of Princeton, Earl Hamilton of Duke,
4
and Willford King, etc. [18], who had seen a debt money system as a root
cause of the Great Depression. Their solution for avoiding a possible “Great
Depression” in the future is called the Chicago Plan. For instance, Irving Fisher,
a great monetary economist in those days, was active in establishing a monetary
reform to stabilize the economy out of recessions such as the Great Depression.
His own plan is known as “100% Money Plan”
I have come to believe that the plan, ”properly worked out and
applied, is incomparably the best proposal ever offered for speedily
and permanently solving the problem of depressions; for it would
remove the chief cause of both booms and depressions, namely the
instability of demand deposits, tied as they are now, to bank loans.”
[1, p. 8]
In contrast with the Glass-Steagal Act, the Chicago Plan has failed to be implemented.
The American Monetary Act2 endeavors to restore the proposal of the
Chicago Plan or 100% Money Plan by replacing the Federal Reserve Act of
1913. In our terminology above, it is nothing but the restoration of a public
money system from a debt money system. Specifically, the Act tries to incorporate the following three features. For details see [16] and [17, 18].
• Governmental control over the issue of money
• Abolishment of credit creation with full reserve ratio of 100%
• Constant inflow of money to sustain economic growth and welfare
When full reserve system is implemented by the Act, bank reserves become
equal to deposits so that we have
Money Supply = Currency in Circulation + Deposits
= Currency in Circulation + Reserves
= High-Powered Money
(2)
Accordingly, under the public money system, money is created only by the
government, and money supply becomes public money only3 .
As a system dynamics researcher, I have become interested in the system
design of macroeconomics proposed by the American Monetary Act, and posed a
2 On Dec. 17, 2010, a bill based on the American Monetary Act was introduced to the
US House Committee on Financial Services by the congressman Dennis Kucinich. This bill is
called H.R. 6550 National Emergency Employment Defense Act of 2010 (NEED). A similar
proposal “Towards A Twenty-First Century Banking And Monetary System” was recently
submitted jointly by PositiveMoney, nef(the new economics foundation), and Prof. Richard
Werner of the Univ. of Southampton, to the Independent Commission on Banking, UK.
3 Money supply is also defined in terms of high-powered money as
Money Supply = m ∗ High-Powered Money
(3)
where m is a money multiplier. Under a full reserve system, money multiplier becomes unitary,
m = 1, so that money can no longer be created by commercial banks.
5
question whether this public money system of macroeconomy can solve the most
imminent problem our economy is facing; that it, accumulation of government
debt. My previous work [16] positively answered the question under a simple
modeling framework. Before exploring it under the complete model of open
macroeconomies here, let us probe how serious our current issue of accumulating
debt is.
2
Debt Crises As A Systemic Failure
Debt Crises Looming Ahead
Being intensified by the recent financial crisis following the collapse of Lehman
Brothers in 2008, severe crisis of sovereign or government debts seems to be
looming ahead. Let us explore how serious accumulating national debts are.
Table 2 shows that, among 33 OECD countries, 18 countries are suffering from
higher debt-to-GDP ratios of more than 50% in 2010. Average ratio of these 33
countries is 66.7%, while world average ratio of 131 countries is 58.3%4 . This
implies that developed countries are facing debt crises more seriously than many
developing countries. .
Country
Japan
Greece
Iceland
Italy
Belgium
Ireland
United States
France
Portugal
Canada
Ratio(%)
196.4
144.0
123.8
118.1
102.5
98.5
96.4
83.5
83.2
82.9
Country
Israel
Germany
Hungary
Austria
United Kingdom
Netherlands
Spain
Poland
OECD
World
Ratio(%)
77.3
74.8
72.1
68.6
68.1
64.6
63.4
50.5
66.7
58.3
Table 2: Public Debt-GDP Ratio(%) of OECD Countries in 2010
Let us now take a look at the US national debt. Following the Lehman shock
in 2008, US government is forced to bail out troubled banks and corporations
with taxpayers’s money, and the Fed continued printing money to purchase poisoned subprime and related securities. In fact, according to the Federal Reserve
Statistical Release H.4.1 the Fed assets jumped more than doubles in a year
from $905 billion, Sept. 3, 2008, to $2,086 billion on Sept. 2, 2009. This unusual yearly increase was mainly caused by the abnormal purchase of federal
4 Data
of 131 countries for 2010 are taken from CIA Factbook at
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2186rank.html
except USA Data, which is taken from US National Debt Clock Real Time on Feb. 12, 2011
at http://www.usdebtclock.org/
6
agency debt securities ($119 billion) and mortgage-backed securities ($625 billion). In addition, US government is obliged to spend more budget on war in
Middle East. These factors contributed to accumulate US national debt beyond
14 trillion dollars as of Feb. 2011, more than 4 trillion dollars’ increase since
Lehman shock in Sept. 2008. Figure 3 (line 2) illustrates how fast US national
debt has been accumulating almost exponentially5 . From a simple calibration
US National Debt
32,000
1
Billion Dollars
24,000
1
16,000
1
12
8,000
2
2
1
2
12
12
1
0 12 12 12 1 2 12 1
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
Time (Year)
1
1
1
1
1
1
1
1
US Debt : Forecasted Debt
2
2
2
2
2
2
2
2
US Debt : US National Debt
Figure 3: U.S. National Debt and its Forecast: 1970 - 2020
of data between 1970 through 2011 , the best fit of their exponential growth
rate is calculated to be 9% !, which in turn implies that a doubling time of
accumulating debt is 7.7 years. If the current US national debt continues to
grow at this rate, this means that the doubling year of the 14 trillion dollars’
debt in 2011 will be 2019. In fact, our debt forecast of that year becomes 29
trillion dollars. Moreover, in 2020, the US national debt will become higher
than 31 trillion dollars, while US GDP in 2020 is estimated to be 24 trillion
dollars according to the Budget of the U.S. Government, Fiscal Year 2011; that
is, the debt-to-GDP ratio in the US will be 129%!.
Can such an exponentially increasing debt be sustained. From system dynamics point of view, it is absolutely impossible. In fact, following the financial
crisis of 2008, sovereign debt crisis hit Greece in 2009, then Ireland, and now
Portugal is said to be facing her debt crisis. Debt crises are indeed looming
ahead among OECD countries.
A Systemic Failure of Debt Money
From the quantity theory of money M V = P T , where M is money supply, V
is its velocity, P is a price level and T is the amount of annual transactions, it
5 Data illustrated in the Figure are obtained from TreasuryDirect Web page,
http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt.htm
7
can be easily foreseen that transactions of a constantly growing economy P T
demand for more money M being incessantly put into circulation. Under the
current debt money system this increasing demand for money has been met by
the following monetary standards.
Gold Standard Failed (1930s) Historically speaking gold standard originated
from the transactions of goldsmith certificates, which eventually developed
into convertible bank notes with gold. Due to the limitation of the supply of gold, this gold standard system of providing money supply was
abandoned in 1930s, following the Great Depression.
Gold-Dollar Standard Failed (1971) Gold standard system was replaced
with the Bretton Woods system of monetary management in 1944. Under
the system, convertibility with gold is maintained indirectly through US
dollar as a key currency, and accordingly called the gold-dollar standard.
Due to the increasing demand for gold from European countries, US president Richard Nixon was forced to suspend gold-dollar convertibility in
1971, and the so-called Nixon Shock hit the world economy.
Dollar Standard Collapsing (2010s?) Following the Nixon shock, flexible
foreign exchange rates were introduced, and US dollar began to be used
as a world-wide key currency without being supported by gold. As a
result, central banks acquired a free hand of printing money without being
constrained by the amount of gold. Due to the exponentially accumulating
debt of the US government as observed above, US dollar is now under a
pressure of devaluation, and the dollar standard system of the last 40 years
is destined to collapse sooner or later.
As briefly assessed above, we are now facing the third major systemic failures
of debt money, following the failures of gold standard and gold-dollar standard
systems. Specifically, our current debt money system seems to be heading toward three impasses: defaults, financial meltdown and hyper-inflation. By using
causal loop diagram of Figure 4, let us now explore a conceivable systemic failure
of the current debt money system.
Defaults
A core loop of the systemic failure is the debt crisis loop. This is a typical
reinforcing loop in which debts increase exponentially, which in turn increases
interest payment, which contributes to accumulate government deficit into debt.
In fact, interest payment is approximately as high as one third of tax revenues
in the US and one fourth in Japan. Eventually, governments may get confronted with more difficulties to continue borrowing for debt reimbursements,
and eventually be forced to declare defaults.
8
Money
Supply
+
+
HyperInflation
Forced Money
Supply
-
Housing
Bubbles
Government
Security
Prices
Interest
Rate
-
+
Bank/ Corporate
Collapses
Debt
+
+
Financial
Meltdown
+
Financial Crisis
Defaults
+
Borrowing
Interest
Payment
+
+
Bailout / Stimulus
Packages
Debt Crisis
Spending
+
+
+
Budget
Deficit
+
Government
Expenditures
Tax
Revenues
Figure 4: Impasses of Defaults, Financial Meltdown and Hyper-Inflation
Financial Meltdown6
Exponential growth of debt eventually leads to the second loop of financial crisis.
To be specific, a runaway accumulation of government debt may cause nominal
interest rate to increase eventually, because government would be forced to keep
borrowing by paying higher interests7 . Higher interest rates in turn will surely
trigger a drop of government security prices, deteriorating values of financial
assets among banks, producers and consumers. Devaluation of financial assets
thus set off may force some banks and producers to go bankrupt in due course.
Under such circumstances, government would be forced to bail out or introduce another stimulus packages, increasing deficit as flow and piling up debt as
stock. This financial crisis loop will sooner or later lead our economy toward
6 This section name was originally “Meltdown” in the paper submitted in the morning of
March 11, 2011, when eastern part of Japan was hit by historical earthquake and tsunami
in the afternoon of the day, followed by the meltdown of the Fukushima Dai-ichi nuclear
power plants in a day or so. To distinguish it from the nuclear meltdown, it is revised as
“Financial Meltdown”. We are indeed at a turning point of history revolved by these two
major meltdowns.
7 This feedback loop from the accumulating debt to the higher interest rate is not yet fully
incorporated in our model below.
9
a second impasse which is in this paper called financial meltdown, following
[8]. Recent financial crisis following the burst of housing bubbles, however, is
nothing but a side attack in this financial crisis loop, though reinforcing the
debts crisis. Tougher financial regulations being considered in the aftermath
of financial crisis might reduce this side attack. Yet they do not vanquish the
financial crisis loop originating from the debts crisis loop in Figure 4.
Hyper-Inflation
To avoid higher interest rate caused by two reinforcing crisis loops, central
banks would be forced to increase money supply (balancing loop), which inevitably leads to a third impasse of hyper-inflation. Incidentally, this possibility
of hyper-inflation in the US may be augmented by the aftermath behaviors of
the Fed following the Lehman Shock of 2008. In fact, as seen above monetary base or high-powered money doubled from $905 billion, Sept. 3, 2008, to
$1,801 billion, Sept. 2, 2009, within a year (FRB: H.3 Release). Thanks to the
drastic credit crunch, however, this doubling increase in monetary base didn’t
trigger inflation so far. In other words, M1 consisting of currency in circulation,
traveler’s checks, demand deposits, and other checkable deposits, only increased
from $1,461 billion in Sept. 2008 to $1,665 billion in Sept. 2009 (FRB: H.6
Release), which implies that money multiplier dropped from 1.61 to 0.92. As of
Feb. 2011, it is 0.91. In short, traditional monetary expansion policy by the Fed
didn’t work to restore the US economy so far. Yet, these tremendous increase
in monetary base will, as a monetary bomb, force the US dollars to be devalued
sooner or later. Once it gets burst, hyper-inflation will attack world economy
in the foreseeable future. One of the main subject of G20 meetings last year in
Seoul, Korea was how to avoid currency wars being led by the devaluation of
dollar.
As discussed above in this way, current economies built on a debt money
system seems to be getting trapped into one of three impasses, and government
may be eventually destined to collapse due to a heavy burden of debts. These
are hotly debated scenarios about the consequences of the rapidly accumulating
debt in Japan, whose debt-GDP ratio in 2009 was 196.4% as observed above; the
highest among OECD countries! Greece has almost experienced this impasse in
2009.
After all, current macroeconomic system has been structurally fabricated by
the Keynesian macroeconomic policy framework in which it is proposed that
the additional government expenditure can rescue the troubled economy from
recession. Yet, it fails to analyze why this fiscal policy is destined to accumulate
government debt as mentioned above. In fact, even though GDP gap is very huge
in Japan, yet due to the fear of runaway accumulation of debt, the Japanese
government is very reluctant to stimulate the economy and, in this sense, it
seems to have totally lost its discretion of public policies for the welfare of
people even though production capacities and workers have been sitting idle
and ready to be called in service. In other words, Keynesian fiscal policy cannot
10
be applied to the troubled Keynesian macroeconomy. With zero interest rate,
its monetary policy has already lost its discretion as well. Isn’t this an irony of
the Keynesian theory? Current debt money system of macroeconomy seems to
have fallen into the dead-end trap.
With these preparatory analysis of the current economic situations in mind,
we are now in a position to expand our previous model to a complete model
of open macroeconomics, and examine how government debt can be liquidated
under two different money systems; that is, debt money system and public
money system.
3
Modeling A Debt Money System
Since 2004 I have been working step-by-step on constructing macroeconomic
models in [10], [11], [12] and [13] based on the method of accounting system dynamics developed in [9]. This series of macroeconomic modeling was completed
in [14] with a follow-up analytical refinement method of price adjustment mechanism in [15]. The model of open macroeconomies in this paper is mostly based
on the model in [14].
For the convenience of the reader, main transactions of the open macroeconomies by producers, consumers, government, banks and the central bank are
replicated here.
Producers
Main transactions of producers, which are illustrated in Figure 33 in the appendix, are summarized as follows.
• Out of the GDP revenues producers pay excise tax, deduct the amount of
depreciation, and pay wages to workers (consumers) and interests to the
banks. The remaining revenues become profits before tax.
• They pay corporate tax to the government out of the profits before tax.
• The remaining profits after tax are paid to the owners (that is, consumers)
as dividends, including dividends abroad. However, a small portion of
profits is allowed to be held as retained earnings.
• Producers are thus constantly in a state of cash flow deficits. To make
new investment, therefore, they have to borrow money from banks and
pay interest to the banks.
• Producers imports goods and services according to their economic activities, the amount of which is assumed to be a portion of GDP in our model,
though actual imports are also assumed to be affected by their demand
curves.
11
• Similarly, their exports are determined by the economic activities of a
foreign economy, the amount of which is also assumed to be a portion of
foreign GDP.
• Produces are also allowed to make direct investment abroad as a portion
of their investment. Investment income from these investment abroad are
paid by foreign producers as dividends directly to consumers as owners
of assets abroad. Meanwhile, producers are required to pay foreign investment income (returns) as dividends to foreign investors (consumers)
according to their foreign financial liabilities.
• Foreign producers are assumed to behave in a similar fashion as a mirror
image of domestic producers
Consumers
Main transactions of consumers, which are illustrated in Figure 34 in the appendix, are summarized as follows.
• Sources of consumers’ income are their labor supply, financial assets they
hold such as bank deposits, shares (including direct assets abroad), and
deposits abroad. Hence, consumers receive wages and dividends from
producers, interest from banks and government, and direct and financial
investment income from abroad.
• Financial assets of consumers consist of bank deposits and government
securities, against which they receive financial income of interests from
banks and government.
• In addition to the income such as wages, interests, and dividends, consumers receive cash whenever previous securities are partly redeemed annually by the government.
• Out of these cash income as a whole, consumers pay income taxes, and
the remaining income becomes their disposal income.
• Out of their disposable income, they spend on consumption. The remaining amount is either spent to purchase government securities or saved.
• Consumers are now allowed to make financial investment abroad out of
their financial assets consisting of stocks, bonds and cash. For simplicity,
however, their financial investment are assumed to be a portion out of
their deposits . Hence, returns from financial investment are uniformly
evaluated in terms of deposit returns.
• Consumers now receive direct and financial investment income. Similar
investment income are paid to foreign investors by producers and banks.
The difference between receipt and payment of those investment income
12
is called income balance. When this amount is added to the GDP revenues, GNP (Gross National Product) is calculated. If capital depreciation
is further deducted, the remaining amount is called NNP (Net National
Product).
• NNP thus obtained is completely paid out to consumers, consisting of
workers and shareholders, as wages to workers and dividends to shareholders, including foreign shareholders.
• Foreign consumers are assumed to behave in a similar fashion as a mirror
image of domestic consumers.
Government
Transactions of the government are illustrated in Figure 35 in the appendix,
some of which are summarized as follows.
• Government receives, as tax revenues, income taxes from consumers and
corporate taxes from producers.
• Government spending consists of government expenditures and payments
to the consumers for its partial debt redemption and interests against its
securities.
• Government expenditures are assumed to be endogenously determined
by either the growth-dependent expenditures or tax revenue-dependent
expenditures.
• If spending exceeds tax revenues, government has to borrow cash from
consumers and banks by newly issuing government securities.
• Foreign government is assumed to behave in a similar fashion as a mirror
image of domestic government.
Banks
Main transactions of banks, which are illustrated in Figure 36 in the appendix,
are summarized as follows.
• Banks receive deposits from consumers and consumers abroad as foreign
investors, against which they pay interests.
• They are obliged to deposit a portion of the deposits as the required
reserves with the central bank.
• Out of the remaining deposits, loans are made to producers and banks
receive interests to which a prime rate is applied.
• If loanable fund is not enough, banks can borrow from the central bank
to which discount rate is applied.
13
• Their retained earnings thus become interest receipts from producers less
interest payment to consumers and to the central bank. Positive earnings
will be distributed among bank workers as consumers.
• Banks buy and sell foreign exchange at the request of producers, consumers and the central bank.
• Their foreign exchange are held as bank reserves and evaluated in terms
of book value. In other words, foreign exchange reserves are not deposited
with foreign banks. Thus net gains realized by the changes in foreign
exchange rate become part of their retained earnings (or losses).
• Foreign currency (dollars in our model) is assumed to play a role of key
currency or vehicle currency. Accordingly foreign banks need not set up
foreign exchange account. This is a point where a mirror image of open
macroeconomic symmetry breaks down.
Central Bank
Main transactions of the central bank, which are illustrated in Figure 37 in the
appendix, are summarized as follows.
• The central bank issues currencies against the gold deposited by the public.
• It can also issue currency by accepting government securities through open
market operation, specifically by purchasing government securities from
the public (consumers) and banks. Moreover, it can issue currency by
making credit loans to commercial banks. (These activities are sometimes
called money out of nothing.)
• It can similarly withdraw currencies by selling government securities to the
public (consumers) and banks, and through debt redemption by banks.
• Banks are required by law to reserve a certain amount of deposits with
the central bank. By controlling this required reserve ratio, the central
bank can control the monetary base directly.
• The central bank can additionally control the amount of money supply
through monetary policies such as open market operations and discount
rate.
• Another powerful but hidden control method is through its direct influence
over the amount of credit loans to banks (known as window guidance in
Japan.)
• The central bank is allowed to intervene foreign exchange market; that is,
it can buy and sell foreign exchange to keep a foreign exchange ratio stable
(though this intervention is actually exerted by the Ministry of Finance in
Japan, it is regarded as a part of policy by the central bank in our model).
14
• Foreign exchange reserves held by the central bank is usually reinvested
with foreign deposits and foreign government securities, which are, however, not assumed here as inessential.
4
Behaviors of A Debt Money System
Mostly Equilibria in the Real Sector
Our open macroeconomic model is now completely presented. It is a generic
model, out of which diverse macroeconomic behaviors are generated, depending
on the purpose of simulations. In this paper let us focus on an equilibrium
growth path as a benchmark for our analysis to follow. An equilibrium state is
called a full capacity aggregate demand equilibrium if the following three output
and demand levels are met:
Full Capacity GDP = Desired Output = Aggregate Demand
(4)
If the economy is not in the equilibrium state, then actual GDP is determined
by
GDP = MIN (Full Capacity GDP, Desired Output )
(5)
In other words, if desired output is greater than full capacity GDP, then actual
GDP is constrained by the production capacity, meanwhile in the opposite case,
GDP is determined by the amount of desired output which producers wish to
produce, leaving the capacity idle, and workers being laid off.
Even though full capacity GDP is attained, full employment may not be
realized unless the following equation is not met;
Potential GDP = Full Capacity GDP.
(6)
Does the equilibrium state, then, exist in the sense of full capacity GDP and full
employment? To answer these questions, let us define GDP gap as a difference
between potential GDP and actual GDP, and its ratio to the potential GDP as
GDP Gap Ratio =
Potential GDP - GDP
Potential GDP
(7)
By trial and error, mostly equilibrium states are attained when price elasticity e is 3, together with all other adjusted parameters, as illustrated in Figure
5.
Our open macrodynamic model has more than 900 variables that are interrelated one another, among which, as benchmark variables for comparative
analyses in this paper, we mainly focus on two variables: GDP gap ratio and
unemployment rate. Figure 6 illustrates these two figures at the mostly equilibrium states. GDP gap ratios are maintained below 1% after the year 6, and
unemployment ratios are less than 0.65% at their highest around the year 6, approaching to zero; that is, full employment. The reader may wonder why these
are a state of mostly equilibria, because some fluctuations are being observed.
15
Potential GDP, GDP and Aggregate Demand
560
YenReal/Year
420
12
1 23
280
4
4
140
4
4
5
5
5
5
5
1 23
23
4
4
4
4
4
5
5
1
123
123
3
1
12 3
12 3
23
5
0
0
5
10
15
20
25
30
Time (Year)
35
40
45
50
Potential GDP : Equilibrium (Debt)
1
1
1
1
1
1
"GDP (real)" : Equilibrium (Debt)
2
2
2
2
2
2
"Aggregate Demand (real)" : Equilibrium (Debt)
3
3
3
3
3
"Consumption (real)" : Equilibrium (Debt) 4
4
4
4
4
4
"Investment (real)" : Equilibrium (Debt)
5
5
5
5
5
5
Figure 5: Mostly Equilibrium States
Economic activities are alive like human bodies, whose heart pulse rates, even
of healthy persons, fluctuate between 60 and 70 per minute in average. Yet,
they are a normal state. In a similar fashion, it is reasonable to consider these
fluctuations as normal equilibrium states.
Unemployment rate
0.008
0.015
0.006
Dmnl
Dmnl
GDP Gap Ratio
0.02
0.01
0.005
0.004
0.002
0
0
5
10
15
20
25
30
Time (Year)
35
40
45
50
GDP Gap Ratio : Equilibrium (Debt)
0
0
5
10
15
20
25
30
Time (Year)
35
40
45
50
Unemployment rate : Equilibrium (Debt)
Figure 6: GDP Gap and Unemployment Rate of Mostly Equilibrium States
Money out of Nothing
For the attainment of mostly equilibria, enough amount of money has to be
put into circulation to avoid recessions caused by credit crunch as analyzed in
[12]. Demand for money mainly comes from banks and producers. Banks are
assumed to make loans to producers as much as desired so long as their vault
cash is available. Thus, they are persistently in a state of shortage of cash as
well as producers. In the case of producers, they could borrow enough fund from
banks. From whom, then, should the banks borrow in case of cash shortage?
16
In a closed economic system, money has to be issued or created within the
system. Under the current financial system of debt money, only the central bank
is endowed with a power to issue money within the system, and make loans
to the commercial banks directly and to the government indirectly through
the open market operations. Commercial banks then create credits under a
fractional reserve banking system by making loans to producers and consumers.
These credits constitute a great portion of money supply. In this way, money
and credits are only crated when commercial banks and government as well as
producers and consumers come to borrow at interest. Under such circumstances,
if all debts are repaid, money ceases to exist. This is an essence of a debt money
system. The process of creating money is known as money out of nothing.
Figure 7 indicates unconditional amount of annual discount loans and its
growth rate by the central bank at the request of desired borrowing by banks.
In other words, money has to be incessantly created and put into circulation in
order to sustain an economic growth under mostly equilibrium states. Roughly
speaking, a growth rate of credit creation by the central bank has to be in
average equal to or slightly greater than the economic growth rate as suggested
by the right hand diagram of Figure 7, in which line 1 is a growth rate of credit
Lending (Central Bank)
Growth Rate of Credit
200
0.6
150
0.3
Dmnl
Yen/Year
1
100
1
0
2
2
2
2
2
1
2
12
1
1
1
1
1
2
2
2
2
2
12
12
12
1
-0.3
1
1
50
-0.6
0
5
0
0
5
10
15
20
25
30
Time (Year)
35
40
45
50
"Lending (Central Bank)" : Equilibrium (Debt)
10
15
20
25
30
Time (Year)
Growth Rate of Credit : Equilibrium (Debt)
Growth Rate : Equilibrium (Debt) 2
2
1
1
2
35
1
2
1
2
40
1
2
45
1
2
1
2
50
1
2
2
Figure 7: Lending by the Central Bank and its Growth Rate
and line 2 is an economic growth rate. In this way, the central bank begins to
exert an enormous power over the economy through its credit control.
Accumulation of Government Debt
So long as the mostly equilibria are realized in the economy, through monetary
and fiscal policies in the days of recession, no macroeconomic problem seems
to exist. This is a positive side of the Keynesian macroeconomic theory. Yet
behind the full capacity aggregate demand growth path in Figure 5 government debt continues to accumulate as the line 1 in the left diagram of Figure 8
illustrates. This is a negative side of the Keynesian theory. Yet most macroeconomic textbooks neglect or less emphasize this negative side, partly because
their macroeconomic frameworks cannot handle this negative side of the debt
money system.
In the model here primary balance ratio is initially set to be one and balanced
17
budget is assumed to the effect that government expenditure is set to be equal
to tax revenues, and no deficit arises. Why, then, does the government continue
to accumulate debt? Government deficit is precisely defined as
Debt (Government)
Debt-GDP ratio
800
2
1
1
600
1.5
1
1
1
1
400
1
1
23
12 31
200
12 3
23
1
1
1
1
Year
Yen
1
23
23
12 31
23
23
23
23
23
23
23
23
12 31
23
23
23
0.5
23
1
1
1
1
1
23
23
23
23
23
23
1
1
1
1
1
1
23
23
0
0
0
5
10
15
"Debt (Government)" : Equilibrium (Debt)
"Debt (Government)" : Primary Balance(=90%)
"Debt (Government)" : Excise Tax (5+5%)
20
25
30
Time (Year)
1
1
3
2
1
3
2
1
3
2
35
1
3
2
1
3
2
40
1
3
2
45
1
3
2
1
3
50
2
1
3
2
0
5
10
15
20
25
30
Time (Year)
"Debt-GDP ratio" : Equilibrium (Debt)
"Debt-GDP ratio" : Primary Balance(=90%)
"Debt-GDP ratio" : Excise Tax (5+5%)
1
3
35
1
2
3
40
1
2
1
2
3
3
45
1
2
3
50
1
2
1
2
3
3
Figure 8: Accumulation of Government Debt and Debt-GDP Ratio
Deficit = Tax Revenues - Expenditure - Debt Redemption - Interest
(8)
Therefore, even if balanced budget is maintained, government still has to keep
paying its debt redemption and interest. This is why it has to keep borrowing
and accumulating its debt; that is to say, it is not balanced in an expanded sense
of budget. Initial GDP in the model is attained to be 300, while government
debt is initially set to be 200. Hence, the initial debt-GDP ratio is around 0.667
year. Yet, the ratio continues to increase to 1.473 year at the year 50 in the
model as illustrated by the line 1 in the right diagram of Figure 8. This implies
the government debt becomes 1.473 years as high as the annual level of GDP.
Remarks: Even if a debt crisis due to the runaway accumulation of debt fails
to be observed in the near future, still there exit some ethical reasons to stop
accumulating debts. First, it continues to create unfair income distribution in
favor of creditors, that is, bankers and financial elite, causing inefficient allocation of resources and economic performances, and eventually social turmoils
among the poor. Secondly, obligatory payment of interest forces the indebted
producers to drive incessant economic growth to the limit of environmental carrying capacity, which eventually leads to the collapse of environment. In short,
a debt money system is unsustainable as a macroeconomic system.
Liquidation Policies of Government Debt
Let us now consider how we could avoid such a debt crisis under the current
debt money system. At the face of the debt crisis as discussed above, suppose
that government is forced to reduce its debt-GDP ratio to less than 0.6 by the
year 50, as currently required to all EU members by the Maastricht treaty.
To attain this goal, though, only two policies are available to the government;
that is, to spend less or to tax more. Let us consider them, respectively.
18
Policy A: Spend Less
This policy assumes that the government spend 10% less than its equilibrium
tax revenues, so that a primary balance ratio is reduced to 0.9 in our economy.
In other words, the government has to make a strong commitment to repay its
debt annually by the amount of 10 % of its tax revenues. Let us assume that
this reduction is put into action at the year 6. Line 2 of the left diagram of
Figure 9 illustrates this reduction of spending.
Under such a radical financial reform, debt-GDP ratio will begin to get
reduced to around 0.65 at the year 25, as illustrated by line 3 of the same
diagram, and to around 0.44 at the year 50, as illustrated by line 2 in the right
diagram of Figure 8. Accordingly, the accumulation of debt will be eventually
curved as shown byline 2 in the left diagram of Figure 8.
Government Budget and Debt (Policy A)
Government Budget and Debt (Policy B)
120 Yen/Year
400 Yen
120 Yen/Year
400 Yen
80 Yen/Year
200 Yen
3
3
3
3
3
3
3
3
3
3
3
3
3
80 Yen/Year
200 Yen
3
3
3
40 Yen/Year
0 Yen
0
1
2 1
2
5
1
1
2
2
1
1
2
2
10
15
Time (Year)
1
1
1
1
2 2
2
2
2
20
1
2
Tax Revenues : Primary Balance(=90%)
1
1
1
1
1
1
1
1 Yen/Year
Government Expenditure : Primary Balance(=90%)
Yen/Year
2
2
2
2
2
2
"Debt (Government)" : Primary Balance(=90%)
3
3
3
3
3
3
3
3 Yen
3
2
2
2
3
1
1
3
3
1
2 2
3
3
1
1 1
1
2
2
2
2
2 1 2 1 2
1
40 Yen/Year
0 Yen
0
25
3
1
1
1
1
2 1 2 1
1
3
3 3
5
10
15
Time (Year)
Tax Revenues : Excise Tax (5+5%)
1
1
Government Expenditure : Excise Tax (5+5%)
"Debt (Government)" : Excise Tax (5+5%)
1
1
2
3
20
1
2
3
1
2
3
1
2
3
25
2
3
3
Yen/Year
Yen/Year
Yen
Figure 9: Liquidation Policies: Spend Less and Tax More
Policy B: Tax More (and Spend More)
Among various sources of taxes to be levied by the government such as income
tax, excise tax, and corporate tax, let us assume here that excise tax is increased,
partly because an increase in consumption (or excise) tax has become a hot
political issue recently in Japan. Specifically the excise tax is assumed to be
increased to 10% from the initial value of 5% in our model; that is, 5% increase.
Line 1 of the right diagram of Figure 9 illustrates the increased tax revenues.
Out of these increased tax revenues, spending is now reduced by 8.5% to
repay the accumulated debt. Though spending is reduced in the sense of primary
balance, it has indeed increased in the absolute amount, compared with the
original equilibrium spending level, as illustrated by line 2 of the same right
diagram of Figure 9. Accordingly the government needs not be forced to reduce
the equilibrium level of budget.
As a result this policy can also successfully reduces debt as illustrated by
line 3 of the same diagram up to the year 25, and further up to the year 50 as
illustrated by line 3 in the left diagram of Figure 8.
19
Triggered Recession and Unemployment
These liquidation policies seem to be working well as debt begins to get reduced.
However, the implementation of these policies turns out to be very costly to the
government and its people as well.
Let us examine the policy A in detail. At the next year of the implementation
of 10 % reduction of a primary balance ratio, growth rate is forced to drop to
minus 2 %, and the economy fails to sustain its full capacity aggregate demand
equilibrium of line 1 as illustrated by line 2 in Figure 10. Compared with the
mostly equilibrium path of line 1, debt-reducing path of line 2 brings about
business cycles. Similarly, line 3 indicates another business cycle triggered by
Policy B.
GDP (real)
YenReal/Year
380
1
2
355
1
2
330
1
2
1
1
1
305
2
1
3
1
3
2
2
1
1
3
2
3
2
3
2
1
3
3
1
2
1
3
2
3
1
2
3
2
1
3
2
3
3
3
2
280
0
5
10
15
20
25
Time (Year)
"GDP (real)" : Equilibrium (Debt)
1
1
1
1
1
1
1
1
1
"GDP (real)" : Primary Balance(=90%) 2
2
2
2
2
2
2
2
2
"GDP (real)" : Excise Tax (5+5%) 3
3
3
3
3
3
3
3
3
Figure 10: Recessions triggered by Debt Liquidation
Figure 11 (lines 2) shows how this policy of debt liquidation triggers GDP
gap and unemployment. GDP gap jumps from 0.3% to 3.9% at the year 7, an
increase of 13 times. Unemployment jumps from 0.5% to 4.8% at the year 7,
more than 9 times. In similar fashion, lines 3 indicate another gaps triggered
by Policy B.
In the previous paper [16], unemployment was left unanalyzed. In this sense,
the result here is a new finding on the effect of debt liquidation under the current
debt money system. The reader should understand that the absolute number is
not essential here, because our analysis is based on arbitrary numerical values.
Instead, comparative changes in factors need be paid more attention.
Figure 12 illustrates how fast wage rate plummets (line 2 in the left diagram)
- another finding in this paper. Concurrently inflation rate plunges to -0.98%
from -0.16%, close to 6 times drop, that is, the economy becomes deflationary
(line 2 in the right diagram). Lines 3, likewise, indicate another behaviors
20
GDP Gap Ratio
Unemployment rate
0.04
0.08
3
3
2
0.02
2
2
2
2
1
1
3
0.01
2
3
2
3
1
3
2
1
2
2
0.02
2
3
2
2
3
0
3
3
0.04
3
3
0
3
0.06
3
Dmnl
Dmnl
3
3
0.03
1
1
5
1
1
2
1
1
10
15
Time (Year)
GDP Gap Ratio : Equilibrium (Debt)
GDP Gap Ratio : Primary Balance(=90%)
GDP Gap Ratio : Excise Tax (5+5%)
1
1
1
2
3
2
3
1
3
2
1
3
2
1
20
1
3
1
1 3
2
1
2
3
25
1
2
3
1
2
3
1
3
1
3
2
3
3
2
2
1
1
1
5
1
2
1
1
10
15
Time (Year)
Unemployment rate : Equilibrium (Debt)
Unemployment rate : Primary Balance(=90%)
Unemployment rate : Excise Tax (5+5%)
1
3
2
1
0
2
3
1
2
2
0
2
1
1
2
3
1
2
3
3
3
1 2
2
1
20
1
2
3
3
2
3
1
1
2
2
3
3
3
1
1
2
1
25
1
2
3
3
Figure 11: GDP Gap and Unemployment
triggered by Policy B.
Wage Rate
Inflation Rate
0.02
2.25
2
1
2.1
3
1
2
3
1
2
3
1
2
1
3
2
2
1
1
1
2
2
2
0.01
1
2
2
2
2
2
2
2
1
1
1
1
1
1
1/Year
Yen/(Year*Person)
2.4
3
3
3
3
1.95
3
3
3
3
1
1
3
2
3
1
1
2
1
3
3
2
2
3
1
1
3
2
3
2
1
1
2
3
2
3
3
1
1
2
1
3
1
3
2
2
2
1
3
3
3
3
2
1
0
-0.01
1.8
-0.02
0
5
10
15
20
25
0
5
10
Time (Year)
15
20
25
Time (Year)
Wage Rate : Equilibrium (Debt) 1
1
1
1
1
1
1
1
1
1
Wage Rate : Primary Balance(=90%)
2
2
2
2
2
2
2
2
2
Wage Rate : Excise Tax (5+5%)
3
3
3
3
3
3
3
3
3
Inflation Rate : Equilibrium (Debt)
1
1
1
1
1
1
1
1
1
Inflation Rate : Primary Balance(=90%) 2
2
2
2
2
2
2
2
2
Inflation Rate : Excise Tax (5+5%) 3
3
3
3
3
3
3
3
3
Figure 12: Wage Rate and Inflation
These recessionary effects triggered by the liquidation of debt turn out to
cross over a national border and become contagious to foreign countries. Figure
13 illustrates how GDP gap and unemployment in a foreign country get worsened
by the domestic liquidation policy A (lines 2) and policy B (lines 3). These
contagious effects under open macroeconomies are observed for the first time in
our expanded macroeconomic model - the third finding in this paper. In this
sense, in a global world economy, no country can be free from a contagious effect
of recessions caused by the debt liquidation policy in other country.
GDP Gap Ratio.f
Unemployment rate.f
0.02
0.01
2
2
0.0075
0.01
3
1
3
2
Dmnl
Dmnl
0.015
2
3
3
2
2
0.005
2
1
0.005
2
2
3
3
2
1
1
2
0
2
1
0
1
3
5
2
1
3
1
2
3
1
3
1
10
1
1
2
2
3
1
15
1
3
3
1
2
3
20
25
1
1
2
3
2
0
Time (Year)
"GDP Gap Ratio.f" : Equilibrium (Debt)
1
"GDP Gap Ratio.f" : Primary Balance(=90%)
"GDP Gap Ratio.f" : Excise Tax (5+5%) 3
0.0025
1
3
1
2
3
1
2
3
1
2
3
1
2
3
2
3
0
1
2
3
2
1
3
1
3
1
2
3 1
2
5
"Unemployment rate.f" : Equilibrium (Debt)
"Unemployment rate.f" : Primary Balance(=90%)
"Unemployment rate.f" : Excise Tax (5+5%)
2
3
2
1
3
2
1 3
1
1
3
1
1
1
10
15
Time (Year)
1
3
2
2
3
3
1
3
2
1
3
2
3
2
3
3
2
Figure 13: Foreign Recessions Contagiously Triggered
21
2
1
1
3
20
2
1
3
1
2
3 2
1
1
3
2
3
1 2
25
1
3
2
Liquidation Traps of Government Debt
Under a debt money system, liquidation policy of government dept will be
eventually captured into a liquidation trap as follows. The liquidation policy
is only implemented with the reduction of budget deficit by spending less or
levying tax; that is; policy A or B in our case. Whichever policy is taken, it
causes an economic recession as analyzed above.
Tax Revenues (Policy A)
Tax Revenues (Policy B)
65
1
1
2
2
1
2
1
2
1
1
2
1
2
72.5
2
1
57.5
1
2
1
53.75
2
1
2
1
1
Yen/Year
Yen/Year
61.25
80
1
2
1
2
65
1
2
1
2
1
1
1
1
2
2
2
2
2
2
1
2
2
57.5
2
1
1
50
2
1
50
0
1
1
2
1
1
2
2
5
10
15
20
25
1
2
0
Time (Year)
Tax Revenues : Equilibrium (Debt)
1
Tax Revenues : Primary Balance(=90%)
1
1
2
10
15
20
25
Time (Year)
1
2
2
5
1
2
1
2
1
2
1
2
Tax Revenues : Excise Tax (5+5%) Only
Tax Revenues : Excise Tax (5+5%)
2
1
2
2
1
1
2
1
2
1
2
1
2
1
2
1
2
1
2
2
Figure 14: Liquidation Traps of Debt
The immediate effects of recession either by policy A or B are the reduction of
tax revenues as illustrated by lines 2 in Figure 14. Eventually revenue reduction
will worsen budget deficit. In other words, policies to reduce deficit result in an
increase in deficit. This constitutes a typical balancing feedback loop, which is
illustrated as “Revenues Crisis” loop in Figure 15.
The other effect of recession will be a forced bailout/stimulus package by
the government, which in turn increases government expenditures, worsening
budget deficit again. This adds up a second balancing feedback loop, which is
illustrated as “Spending Crisis” loop in Figure 15.
Normal
Spending
+
Government
Expenditures
+
-
+
Budget
Deficit
Tax
Revenues
Bailout /
Stimulus
Packages
-
Revenues Crisis
Spending Crisis
+
Recession
Figure 15: Causal Loop Diagram of Liquidation Traps of Debt
In this way the liquidation policies of government debt are retarded by two
22
balancing feedback loops of revenues crisis and spending crisis, making up liquidation traps of government debt. This indicates that the debt money system
combined with the traditional Keynesian fiscal policy becomes a dead end as a
macroeconomic monetary system.
5
Modeling A Public Money System
We are now in a position to implement the alternative macroeconomic system
discussed in the introduction, as proposed by the American Monetary Act, in
which central bank is incorporated into a branch of government and a fractional
reserve banking system is abolished. Let us call this new system a public money
system of open macroeconomies. Money issued under this new system plays a
role of public utility of medium of exchange. Hence the newly incorporated institution may be appropriately called the Public Money Administration (PMA)
in this paper.
Under the new system, transactions of only government, commercial banks
and the public money administration (formally the central bank) need be revised
slightly. All domestic models of a public money system of open macroeconomies
as well as foreign exchange and balance of payment are supplemented to the appendix of this paper. Let us start with the description of the revised transactions
of the government.
Government
• Balanced budget is assumed to be maintained; that is, a primary balance
ratio is unitary. Yet the government may still incur deficit due to the debt
redemption and interest payment.
• Government now has the right to newly issue money whenever its deficit
needs to be funded. The newly issued money becomes seigniorage inflow
of the government into its equity or retained earnings account.
• The newly issued money is simultaneously deposited with the reserve account of the Public Money Administration. It is also booked to its deposits
account of the government assets.
• Government could further issue money to fill in GDP gap.
Revised transaction of the government is illustrated in Figure 35 in the appendix,
where green stock box of deposits is newly added to the assets.
Banks
Revised transactions of commercial banks are summarized as follows.
• Banks are now obliged to deposit a 100% fraction of the deposits as the
required reserves with the public money administration. Time deposits
are excluded from this obligation.
23
• When the amount of time deposits is not enough to meet the demand
for loans from producers, banks are allowed to borrow from the public
money administration free of interest; that is, former discount rate is now
zero. Allocation of loans to the banks will be prioritized according to
the public policies of the government. (This constitutes a market-oriented
issue of new money. Alternatively, the government can also issue new
money directly through its public policies to fill in GDP gap as already
discussed above.)
Line 1 in Figure 16 illustrates the
Required Reserve Ratio
initial required reserve ratio of 5%
1
in our model. We have here assumed three different ways of abolish0.75
ing a fractional reserve banking sys0.5
tem. Line 2 shows that a 100% fraction is immediately attained in the
0.25
following year of its implementation,
0
while line 3 illustrates it is attained
0
5
10
15
20
25
Time (Year)
in 5 years. Line 4 indicates it is gradually attained in 10 years, starting
from the year 6. In our analysis beFigure 16: Required Reserve Ratios
low, 100% fraction will be assumed to
be attained in 5 years as a representative illustration of fractional behaviors.
2
3
2
2
3
2
3
4
3
2
4
2 3
4
2
1
1
3
3
2
4
4
3
Dmnl
4
4
4
2
1
4 1
3
3
2
4
1
3
2
1
Required Reserve Ratio : Equilibrium (Debt)
Required Reserve Ratio : Public Money (100% 1 Yr)
Required Reserve Ratio : Public Money (100% 5 Yr)
Required Reserve Ratio : Public Money (100% 10 Yr)
1
1
1
2
1
1
3
4
2
1
3
4
1
2
1
3
4
2
1
3
4
2
1
3
4
1
2
1
3
2
4
Public Money Administration (Formerly Central Bank)
The central bank is now incorporated as one of the governmental organizations
which is here called the Public Money Administration (PMA). Its revised transactions become as follows.
• The PMA accepts newly issued money of the government as seigniorage
assets and enter the same amount into the government reserve account.
Under this transaction, the government needs not print hard currency,
instead it only sends digital figures of the new money to the PMA.
• When the government want to withdraw money from their reserve accounts at the PMA, the PMA could issue new money according to the
requested amount. In this way, for a time being, former central bank
notes and government money coexist in the market.
• With the new issue of money the PMA meets the demand for money by
commercial banks, free of interest, according to the guideline set by the
government public policies.
Under the revised transactions, open market operations of sales and purchases of government securities become ineffective, simply because government
24
debt gradually diminishes to zero. Furthermore, discount loan is replaced with
interest-free loan. This lending procedure becomes a sort of open and public
window guidance, which once led to the rapid economic growth after world war
II in Japan [7]. Accordingly, interest incomes from discount loans and government securities are reduced to be zero eventually. Transactions of the public
money administration are illustrated in Figure 37 in the appendix, with green
stock boxes of seigniorage assets and government reserves being added.
6
Behaviors of A Public Money System
Liquidation of Government Debt
Under the public money system of open macroeconomies, the accumulated debt
of the government gets gradually liquidated as demonstrated by line 4 in the
left diagram of Figure 17, which is the same as the left diagram of Figure 8
except the line 4. Recollect that line 1 is a benchmark debt accumulation of
Debt (Government)
Debt-GDP ratio
800
2
1
600
1.5
1
1
Year
Yen
1
400
1
1
1
12
12 34
200
3
12
12 34
23
23
2
23
3
23
2
23
3
4
23
2
3
0.5
1
3
2
3
23
23
4
2
3
23
23
2
3
4
4
0
10
23
4
4
5
1
1
1
23
4
0
1
1
1
1
1
1
1
1
15
"Debt (Government)" : Equilibrium (Debt)
"Debt (Government)" : Primary Balance(=90%)
"Debt (Government)" : Excise Tax (5+5%)
"Debt (Government)" : Public Money (100% 5 Yr)
4
4
4
20
25
30
Time (Year)
1
3
2
1
3
4
2
1
3
4
2
3
4
4
35
40
1
1
2
3
4
2
0
4
45
1
3
4
2
50
1
3
4
2
4
0
5
10
15
"Debt-GDP ratio" : Equilibrium (Debt)
"Debt-GDP ratio" : Primary Balance(=90%)
"Debt-GDP ratio" : Excise Tax (5+5%)
"Debt-GDP ratio" : Public Money (100% 5 Yr)
1
4
4
4
20
25
30
Time (Year)
2
1
3
4
2
1
3
4
2
1
3
4
2
3
4
4
35
40
1
1
2
3
4
2
4
45
1
3
2
4
50
1
3
2
4
Figure 17: Liquidation of Government Debt and Debt-GDP Ratio
the mostly equilibria under the debt money system, while lines 2 and 3 are the
decreasing debt lines when debt-ratio are reduced under the same system. Now
newly added line 4 indicates that the government debt continues to decline when
a 100% fraction ratio is applied in 5 years, starting at the year 6. The other
two cases of attaining the 100% fractional reserve discussed above, that is, in a
year or 10 years, reduce the debts exactly in a similar fashion. This means that
the abolishment period of a fractional level does not affect the liquidation of the
government debt, because banks are allowed to fill in the sufficient amount of
cash shortage by borrowing from the PMA in the model.
It is shown in Figure 18 that the liquidation of government debt (line 4) is
performed without triggering economic recession contrary to the case of debt
money system (lines 2 and 3). To observe these comparisons in detail, let us
illustrate GDP gap ratios and unemployment rates in Figure 19, in which the
same line numbers apply as in the above figures. The liquidation of government debt under the public money system (line 4) can be said to be far better
performed than the current debt system because of its accomplishment without
recession and unemployment.
25
GDP (real)
380
YenReal/Year
330
4
1
2
1
4
1
2
3
2
3
3
2
3
2
4
1
3
305
1
4
1
2
4
4
3
1
2
4
3
2
1
4
2
3
1
4
2
3
1
4
355
3
2
1
4
3
280
0
5
10
15
20
25
Time (Year)
"GDP (real)" : Equilibrium (Debt)
1
1
1
1
1
1
1
"GDP (real)" : Primary Balance(=90%) 2
2
2
2
2
2
2
"GDP (real)" : Excise Tax (5+5%) 3
3
3
3
3
3
3
"GDP (real)" : Public Money (100% 5 Yr) 4
4
4
4
4
4
Figure 18: No Recessions Triggered by A Public Money System
Unemployment rate
GDP Gap Ratio
0.08
0.04
3
2
3
3
3
0.06
2
0.02
Dmnl
Dmnl
0.03
2
2
0.04
2
1
3
2
4
3
0.01
3
3
3
4
1
0
2
2
4
3
2
2
1
0
4
1
5
1
4
4
1
4
1
1
10
15
Time (Year)
GDP Gap Ratio : Equilibrium (Debt)
GDP Gap Ratio : Primary Balance(=90%)
GDP Gap Ratio : Excise Tax (5+5%)
3
GDP Gap Ratio : Public Money (100% 5 Yr)
0.02
2
1
1
2
3
1
2
3
4
2
1
3
1 4
2
4
1
20
1
2
1
2
3
4
3
2
4
3
3
0
1
3
3
4
2
1
4
3
3
2
3
2
4
1
4
4
1
4
1
5
3
2
4
1
4
4
1
1
10
15
Time (Year)
Unemployment rate : Equilibrium (Debt)
Unemployment rate : Primary Balance(=90%)
Unemployment rate : Excise Tax (5+5%)
Unemployment rate : Public Money (100% 5 Yr)
2
4
1
0
25
1
1
3
2
4
1
3
2
4
1
3
2
4
1
3
3
2
2
4
4
2 3
1 4
1
3
3
2
1
20
2
4
1
3
3
2
4
1
2
4
25
1
3
2
4
Figure 19: GDP Gap and Unemployment
Inflation Rate
Wage Rate
0.02
2.25
2
1
2.1
4
3
2
1
3
1
4
2
3
4
1
4
2
1
2
4
1
4
1
2
4
2
1
4
1
4
1
4
2
2
2
0.01
1
2
4
3
3
1.95
3
3
3
2
3
3
3
3
1/Year
Yen/(Year*Person)
2.4
2
1
0
1
1
4
4
3
3
2
2 4
3
1
4
1
4
1
1
4
1
4
3
2
2
3
3
2
3
4 1
2
1
3 4
2
3
4
1
2
2
-0.01
1.8
0
5
10
15
20
25
Time (Year)
-0.02
0
Wage Rate : Equilibrium (Debt)
1
1
1
1
1
1
1
Wage Rate : Primary Balance(=90%)
2
2
2
2
2
2
2
Wage Rate : Excise Tax (5+5%) 3
3
3
3
3
3
3
Wage Rate : Public Money (100% 5 Yr)
4
4
4
4
4
4
Inflation
Inflation
Inflation
Inflation
Rate
Rate
Rate
Rate
5
:
:
:
:
10
15
Time (Year)
Equilibrium (Debt)
Primary Balance(=90%)
Excise Tax (5+5%)
Public Money (100% 5 Yr)
1
3
20
1
2
1
2
3
3
4
1
2
3
4
25
1
2
3
4
1
2
3
4
4
Figure 20: Wage Rate and Inflation
Moreover, Figure 20 illustrates that wage rate and inflation rates (lines 4)
stay closer to the rates of mostly equilibria. Accordingly, the liquidation of debt
under the public money system can be said to be attained without reducing
26
wage rate and setting off inflation.
Furthermore, the liquidation of debt under the public money system is not
contagious to foreign countries as illustrated by lines 4 in Figure 21. That is,
GDP gap and unemployment in a foreign country (lines 4) remain closer to their
almost equilibria states (lines 1).
GDP Gap Ratio.f
Unemployment rate.f
0.02
0.01
2
0.015
0.0075
Dmnl
Dmnl
2
4 1
3
0.01
2
2
0.005
3
2
4
1
2
2
0.005
0.0025
4
3
0
2
1
0
2
3
4
3
3 1
4
4
4
3
1
1
10
15
Time (Year)
1
1
3
4
2
1
3
4
2
1
3
4
2
1
2
4
1
3
2
1
5
"GDP Gap Ratio.f" : Equilibrium (Debt)
"GDP Gap Ratio.f" : Primary Balance(=90%)
"GDP Gap Ratio.f" : Excise Tax (5+5%)
"GDP Gap Ratio.f" : Public Money (100% 5 Yr)
4
1
2
2
1
3
4
3
3
2
1
3
4
2
1
3
4
2
25
1
3
1
0
2
20
3
4
1
2
4
2
4
0
2
1
4
3
3
2
1
5
"Unemployment rate.f" : Equilibrium (Debt)
"Unemployment rate.f" : Primary Balance(=90%)
"Unemployment rate.f" : Excise Tax (5+5%)
"Unemployment rate.f" : Public Money (100% 5 Yr)
3 1 3
4
1
4
3
2
1
3
4
2
1
3
4
2
3
2
3
4 1
10
15
Time (Year)
1
2
3
2
3 4
1
1
4
1
3
4
2
1
3
2
4 1
1
4
20
4
2
1
3
4
2
3 1
4
25
1
3
2
4
Figure 21: Foreign Recessions are Not Triggered
Debt Crises can be Subdued!
In sum, the pubic money system is, from the results of the above analyses,
demonstrated as a superior alternative system for liquidating government debt
in a sense that its implementation does not trigger recessions and unemployment
both in domestic and foreign economies. In other words, looming debt crises
caused by the accumulation of government debt under a current debt money
system can be thoroughly subdued without causing recessions, unemployment,
inflation, and contagious recessions in a foreign economy.
7
Public Money Policies
The role of a newly established public money administration under a public
money system is to maintain a monetary value, similar to the role assigned to
the central banks under the debt money system. Keynesian monetary policy
under the debt money system controls money supply indirectly through the manipulation of required reserve ratio, discount ratio, and open market operations.
Accordingly its effect is after all limited, as demonstrated by a failure of stimulating the prolonged recessions in Japan during 1990s through 2000s with the
adjustment of the interest rates, specifically with zero interest rate policies.
Compared with these ineffective Keynesian monetary and fiscal policies, public money policies we have introduced here are simpler and more direct; that is,
they are made up of the management of the amount of public money in circulation through governmental spending and tax policies. Interest rate is no longer
used by the public money administration as a policy instrument and left to be
determined in the market.
27
Potential
GDP
GDP
+
+
GDP
Gap
Maximal
Inflation
Inflation
+
Public
Money
Anti-Recession Policy +
-+
Anti-Inflation Policy
+
Tolerable
Gap
Budgetary
Restructure
+
Step Down
Step down of
the PMA Head
Figure 22: Public Money Policies
More specifically, our public money policies consist of three balancing feedback loops as shown in Figure 22. Anti-recession policy is taken in the case of
economic recession to fill in a GDP gap; that is, government spends more than
tax revenues by newly issuing public money. On the other hand, in the case of
inflationary state, anti-inflation policy of managing public money is conducted
such that public money in circulation is sucked back by raising taxes or cutting
government spending. As a supplement to this policy in the case of an unusually higher inflation rate that is overshooting a maximum tolerable level, a step
down policy of budgetary restructure will be carried out so that a head of the
public monetary administration is forced to resign for his or her mismanagement
of holding a value of public money.
Recession
Let us now examine in detail how anti-recession policy help restore the economy.
For this purpose a recession or GDP gap is purposefully produced by changing
the value of Normal Inventory Coverage from 0.1 to 0.5 months and Output
Ratio Elasticity (Effect on Price) from 3 to 1, as illustrated in the left diagram
of Figure 23.
To fill a GDP gap under such a recessionary situation, let us continue to
newly issue public money by the amount of 5 annually for 20 years, starting
at t=7. The right diagram of Figure 23 confirms that the GDP gap now gets
completely filled in. More specifically, Figure 24 demonstrates how GDP gap
ratio and unemployment rate caused by this recession (lines 1) are recovered by
the public money policy as illustrated by lines 2.
28
GDP Gap
GDP Gap
380
380
1
2
340
1
2
2
1
1
2
1
2
1
2
320
300
2
1
1
2
2
1
1
2
340
320
1
300
2
0
5
10
15
20
2
1
25
1
1
2
1
2
2
2
1
2
1
2
2
1
2
0
5
10
Time (Year)
Potential GDP : GDP Gap
"GDP (real)" : GDP Gap
1
1
2
1
2
1
2
15
20
25
Time (Year)
1
2
2
1
2
1
2
1
2
1
2
1
2
1
2
1
1
1
2
1
2
1
1
2
360
YenReal/Year
YenReal/Year
360
1
2
1
2
1
2
1
2
1
2
Potential GDP : Public Money Policy
"GDP (real)" : Public Money Policy
1
2
2
1
1
2
1
2
1
2
1
2
1
2
1
2
1
2
1
2
2
Figure 23: GDP Gap and Its Public Money Policy
Unemployment rate
GDP Gap Ratio
0.04
0.04
1
0.03
2
Dmnl
Dmnl
1
0.03
1
1
0.02
2
0.02
1
1
0.01
2
0.01
1
2
2
1
1
1
0
0
2
1
1
2
5
2
2
2
1
2
1
2
2
10
15
Time (Year)
GDP Gap Ratio : GDP Gap
1
GDP Gap Ratio : Public Money Policy
1
1
1
2
1
2
1
2
1
1
2
1
2
20
1
2
1
2
1
2
1
25
1
2
2
2
1
2
0
2
Unemployment rate : GDP Gap
1
1
Unemployment rate : Public Money Policy
1
0
2
1
1
5
2
1
2
1
2
1
2
2
10
15
Time (Year)
1
1
2
1
2
1
2
1
1
2
2
1
20
1
2
1
2
1
25
1
2
Figure 24: GDP Gap and Unemployment Recovered
Inflation
As shown above, so long as a GDP gap exists, an increase in the government
expenditure by newly issuing public money can restore the equilibrium by stimulating the economic growth. Yet, this money policy does not trigger a price
hike and inflation as illustrated by lines 2 in Figure 25 in comparison with lines
1 of GDP gap.
Yet, inflation could occur if government happens to mismanage the amount
of public money. To examine the case, let us take a benchmark equilibrium
state attained by the public money policy as above (lines 2), then assume that
the government overly increases public money to 15 instead of 5 at t=7 for
25 years in the above case. This corresponds to a continual inflow of money
into circulation. Under such situations, Figure 25 shows how price goes up and
inflation rate jumps to 1.3% (line 3) from the level of 0.3% attained by the
public money policy (line 2), 4 times hike, at the year 9.
The inflation thus caused by the excessive supply of money also triggers a
GDP gap of 5% at the year 12 (or -3.1% of economic growth or recession), and
an unemployment rate of 7.7% at the year 13 as illustrated by lines 3 in Figure
26.
Persistent objection to the public money system has been that government,
once a free-hand power of issuing money is being endowed, tends to issue more
money than necessary, which tends to bring about inflation eventually, though
29
Price
Inflation Rate
1.048
0.02
3
3
3
3
0.014
3
3
3
2
2 2
2
1
1
3
1/Year
Yen/YenReal
1.034
3
1.020
1.006
2
2
3 2
1
2
1
1
1
1
3
3 1
2
3 1
2
1
1
1
5
1
1
2
1
1
3
1
2
1
2
3
3
2
0.002
1
3
1
2
3
20
1
2
3
1
2
3
1
2
3
25
1
2
3
2
0
2
3
3
1
2
2
2
1
3 2
1
1
5
3
2
2 1
1
10
15
Time (Year)
1
1
20
1
2
3
3 2
1
1
3 2
3
3
Inflation Rate : GDP Gap
1
Inflation Rate : Public Money Policy
Inflation Rate : Inflation
1
3
3
2
1
3
2
1
3
2
1
3
-0.004
10
15
Time (Year)
Price : GDP Gap
1
Price : Public Money Policy
Price : Inflation
3
0.008
2
1
0.9916
0
2
2
2
3
3
1
2
3
1
2
3
25
1
2
3
1
2
3
2
3
3
Figure 25: Price and Inflation Rate
Unemployment rate
GDP Gap Ratio
0.08
0.06
3
0.045
0.06
Dmnl
Dmnl
3
3
0.03
1
1
3
2
1
1
0
2
1
1
3
5
0.02
3
3
2
2
1
3 2
2
1
2
10
15
Time (Year)
GDP Gap Ratio : GDP Gap
1
GDP Gap Ratio : Public Money Policy
GDP Gap Ratio : Inflation
3
2 1
1 3
1
1
3
2
1
1
3
3
2
1
2
1
2
3
3
3
1
0.015
0
3
0.04
3
1
2
3
3 1
2
20
1
2
3
3
2 1
1
2
3
1
2
3
3
2
25
2
3
3
3
2
0
1
1
2
2
3
2
3
1
3
3
2
2
Unemployment rate : GDP Gap
1
1
Unemployment rate : Public Money Policy
Unemployment rate : Inflation
3
1
0
2
1
3
1
5
1
2
1
1
2
1
2
3
3
1
1
2
3
3
2
1
2
3
20
1
2
3
3
1
2
1
2
10
15
Time (Year)
1
2
3
2
3
1
2
1
3
1
25
1
2
3
3
Figure 26: GDP Gap and Unemployment
history shows the opposite [17]. The above case could be unfortunately one
such example. With the introduction of anti-inflationary policy, however, this
type of inflation can be easily curbed by the decrease in public money. Let
us define maximal inflation as a maximum tolerable inflation rate set by the
government. For instance, it was set to be 8% in [16], as suggested by the
American Monetary Act. Then, anti-inflationary policy works such that if an
inflation rate approaches to the maximal level and a tolerable gap decreases to
zero, the amount of public money will be reduced to curb the inflation through
the decrease in government spendings and/or the increase in taxes.
Step Down
What will happen if the tolerable gap becomes negative; that is, current inflation rate becomes higher than the maximal inflation? This could occur, for
instance, when the incumbent government tries to cling to the power by unnecessarily stimulating the economy in the years of election as history demonstrates.
Business cycle thus spawned is called political business cycle. “There is some
evidence that such a political business cycle exits in the United States, and the
Federal Reserve under the control of Congress or the president might make the
cycle even more pronounced [6, p.353].” Indeed Figure 27, obtained from the
above analysis of inflation, shows how business cycles could be caused by the
mismanagement of the increase in public money (line 3) when no GDP gap ex-
30
ists (line 2). This could be a serious moral hazard lying under the public money
system.
GDP (real)
2
364
1
3
1
2
YenReal/Year
1
348
2
3
1
3
2
1
2
3
2
1
332
2
1
2
316
3
1
2
1
3
2
2
3
1
3
3
3
1
1
300
2
1
0
3
1
3
2
2
1
3
3
2
5
10
15
20
25
Time (Year)
"GDP (real)" : Equilibrium (Debt)
"GDP (real)" : Public Money Policy
"GDP (real)" : Inflation
3
3
1
1
2
3
1
2
3
1
2
3
1
2
3
1
2
3
1
2
3
1
2
3
1
2
3
2
3
Figure 27: Business Cycles caused by Inflation under No GDP Gap
Proponents of the central bank may take advantage of this cycle as an excuse
for establishing the independence of the central bank from the intervention by
the government. How can we avoid the political business cycle, then, without
resorting to the independence of the central bank? As a system dynamics researcher, I suggest an introduction of the third balancing feedback loop of Step
Down as illustrated in Figure 22. This loop forces, by law, a head of the Public
Money Administration to step down in case a tolerable gap becomes negative;
that is, an inflation rate gets higher than its maximum tolerable rate. Then a
newly appointed head is obliged to restructure a budgetary spending policy to
stabilize a monetary value. The stability of a public money system depends on
the legalization of a forced step down of the head of the public money administration.
Conclusion
Money is, by Aristotle (384 - 322 BC), fiat money as legal tender and has been
historically created either as public money or debt money. Current macroeconomies in many countries are built on a debt money system, which, however,
failed to create enough amount of money to meet an increasing demand for
growing transactions. Gold standard failed in 1930s and was replaced with
gold-dollar standard after World War II, which alas failed in 1971. Then current dollar standard was established, allowing free hand of creating money by
central banks, from which, unfortunately, current runaway government debt has
31
been derived. The accumulation of debt will sooner or later lead to impasses
of defaults, financial meltdown or hyper-inflation; in other words current debt
money system is facing its systemic failure.
Under such circumstances it is shown that it becomes very costly to save the
current debt money system by reducing government debt and debt-GDP ratio;
that is, a liquidation process of debt inevitably triggers economic recessions and
unemployment of both domestic and foreign economies.
An alternative system, then, is presented as a public money system of open
macroeconomies as proposed by the American Monetary Act in which only
government can issue money with a full reserve banking system. It is shown
that under the public money system government debt can be liquidated without
triggering recession, unemployment and inflation.
Finally, in place of the current Keynesian monetary and fiscal policies, public
money policies are introduced, consisting of three balancing feedback loops of
anti-recession policy, anti-inflation policy and restructuring policy of step down
of a head of PMA (Public Money Administration). Public money policies thus
become simpler and can affect directly to the workings of the economy.
Accordingly, from a viewpoint of system design, a public money system
of macroeconomies as proposed by the American Monetary Act seems to be
worth being implemented if we wish to avoid impasses such as defaults, financial
meltdown and hyper-inflation. 8 .
8 This implementation might bring about fortunate by-products. A debt money system of
the current macroeconomy has been pointed out to constitute a root cause of unfair income
distribution between haves and haves-not, wars due to recessions, and environmental destruction due to a forced economic growth to pay interest on debt. Accordingly, a public money
system remove the root cause of these problems and could be panacea for solving them. Due
to the limited space, further examination will be left to the reader
32
Appendix: MacroDynamics 2.5 Illustrated9
Title
Overview
Population
Labor Force
Population
Labor Force.f
Currency
Circulation
Currency
Circulation.f
GDP
GDP.f
Interest, Price Interest, Price
& Wage
& Wage.f
Producer
Producer.f
Consumer
Consumer.f
Government
Government.f
Banks
Banks.f
Macroeconomic Dynamics Model
of A Public Money System
< MacroDynamics 2.5 >
- Accounting System Dynamics Approach (c) All Rights Reserved, June 2011
Porf. Kaoru Yamaguchi, Ph.D.
Doshisha Business School
Doshisha University
Kyoto, Japan
Public Money Public Money
Administration Administration.f
(Central Bank) (Central Bank.f)
Foreign
Exchange Rate
Balance of
Payments
GDP
Simulation
GDP
Simulation.f
Fiscal Policy
Fiscal Policy.f
Monetary
Policy
Monetary
Policy.f
[email protected]
This model provides a generic system on which
various schools of economic thoughts can be built.
Your comments and suggestions are most welcome.
Trade & Investment Abroad
Simulation
Economic
Indicators
B/S
Check
Economic
Indicators.f
B/S C
heck.f
(C) Prof. Kaoru
Yamaguchi, Ph.D.
Doshisha Business School
Kyoto, Japan
Figure 28: Title Page of the MacroDynamics Model
9 In this illustrated section of the model, only domestic macroeconomy is presented. The
model called MacroDynamics version 2.5 is available through the author.
33
Figure 29: Model Overview
34
GDP
Simulation.f
Fiscal Policy.f
Monetary
Policy.f
GDP
Simulation
Fiscal Policy
Monetary
Policy
B/S C
heck.f
B/S
Check
(C) Prof. Kaoru
Yamaguchi, Ph.D.
Doshisha Business School
Kyoto, Japan
Economic
Indicators.f
Economic
Indicators
Trade & Investment Abroad
Simulation
Balance of
Payments
Foreign
Exchange Rate
Public Money Public Money
Administration Administration.f
(Central Bank) (Central Bank.f)
Banks.f
Government.f
Government
Banks
Producer.f
Consumer.f
Producer
Consumer
Interest, Price Interest, Price
& Wage
& Wage.f
GDP.f
Currency
Circulation.f
Currency
Circulation
GDP
Population
Labor Force.f
Population
Labor Force
Overview
Title
Income Tax
Consumer
(Household)
Public Services
Investment
(Housing)
Banks
National Wealth
(Capital
Accumulation)
Labor & Capital
Gross
Domestic
Products
(GDP)
Wages & Dividens (Income)
Population / Labor Force
Government
Investment (Public
Facilities)
Consumption
Saving
Money Supply
Public Money
Administration
Public Services
Investment (PP&E)
Production
Loan
Macroeconomic System Modeling Overview
Corporate Tax
Producer
(Firm)
Direct and Financial
Investment Abroad
Import
Export
Income Tax
Consumer
(Household).f
Public Services
Investment
(Housing)
National Wealth
(Capital
Accumulation)
Labor & Capital
Gross
Domestic
Products
(GDP).f
Wages & Dividens (Income)
Population / Labor Force.f
Government.f
Investment (Public
Facilities)
Consumption
Saving
Banks.f
Money Supply
Public Money
Administration.f
Public Services
Investment (PP&E)
Production
Loan
Producer
(Firm).f
Corporate Tax
Macroeconomic System Modeling Overview (Foreign Country)
Figure 30: Population and Labor Force
35
births
<College
Education>
High
School
College
Education
college
attendance
ratio
HS Graduation
deaths
15 to 44
Population
15 To 44
initial
population
15 to 44
<Labor Force>
Going to
College
High
schooling
time
<Voluntary
Unemployed>
maturation
14 to 15
Productive
Population
mortality
0 to 14
deaths
0 to 14
Population
0 To 14
<High School>
total fertility table
total fertility
reproductive
lifetime
initial
population
0 to 14
College
schooling
time
College
Graduation
Total
Graduation
mortality
15 to 44
maturation
44 to 45
Population
15 to 64
Portion to
15 to 44
Population
Voluntary
Unemployed
Initially
Unemployed
Labor
Unemployed
Labor
initial
population
65 plus
Time to Adjust
Labor
Desired
Labor
Initially
Employed
Labor
deaths 65
plus
mortality 65 plus
<Expected Wage
Rate>
<Price>
<Desired
Output
(real)>
<Excise Tax
Rate>
<Exponent
on Labor>
<GDP Gap
Ratio>
Labor Market
Flexibility
Retired
(Employed)
Population
65 Plus
Net
Employment
Employed
Labor
labor force
participation ratio
Retired
(Voluntary)
maturation
64 to 65
Labor
Force
New
Unemployment
Unemploy
ment rate
New
Employment
mortality
45 to 64
deaths 45
to 64
Population
45 To 64
initial
population
45 to 64
initial
population
15 to 64
Figure 31: GDP Determination
36
<GDP (real)>
GDP Gap
Ratio
Technological
Change
Initial
Potential
GDP
Potential
GDP
Initial
Labor
Force
Exponent
on Labor
<Excise Tax
Rate>
Exponent
on Capital
Full Capacity
GDP
<Labor Force>
Initial
Capital
(real)
<Employed
Labor>
Desired
Capital-Output
Ratio
Depreciation Rate
Depreciation
(real)
Capital-Output
Ratio
Desired Output
(real)
<Interest Rate>
Time to Adjust
Inventory
Sales (real)
<Capital-Output
Ratio>
Desired
Investment (real)
Capital under
Construction
Change in AD
Forecasting
Time to Adjust
Capital
Investment
(real)
<Price>
Time to Adjust
Forecasting
Aggregate
Demand (real)
Gross Domestic
Expenditure (real)
<Investment>
Normal Inventory
Coverage
Net Investment
(real)
Interest
Sensitivity
Desired Capital
(real)
<Initial Capital
(real)>
Capital
Completion
Construction
Period
Aggregate
Demand
Forecasting
Desired Inventory
Desired Inventory
Investment
Inventory (real)
Capital (PP & E)
(real)
GDP (real)
Inventory
Investment
(real)
Aggregate
Demand
Forecasting
(Long-run)
<Full Capacity
GDP>
Time to Adjust
Forecasting (Long-run)
Change in AD
Forecasting (Long-run)
Long-run
Production Gap
Growth
Covertion to %
Growth Rate (%)
Growth Rate
<GDP (real)>
Production(-1)
Growth Unit
<Real Foreign
Exchange Rate>
<Price>
Government
Expenditure
<Public Money
Expenditure>
<Imports (real)>
Government
Expenditure (real)
Net Exports
(real)
<Imports (real).f>
<Effect on
Consumption>
Consumption
Exports (real)
<Investment
(real)>
Consumption
(real)
<Price>
Figure 32: Interest Rate, Price and Wage Rate
37
<Desired
Inventory>
<Deposits (Banks)>
Inventory
Ratio
Production
Ratio
Effect on
Price
Change in Price
Supply of
Money
(real)
Discount Rate
(Seigniorage)
Cost-push (Wage)
Coefficient
Money
Supply
Delay Time of
Price Change
Velocity of
Money
Money Ratio Elasticity
(Effect on Interest Rate)
Currency in
Circulation
Weight of
Inventory Ratio
<Inventory (real)>
<Desired
Output (real)>
<Potential GDP>
Discount Rate
Change Time
Initial
Discount
Rate
Delay Time of
Interest Rate Change
Output Ratio Elasticity
(Effect on Price)
<Foreign Exchange
(Banks)>
<Net Foreign
Exchange (Banks)>
<Vault Cash
(Banks)>
<Cash (Government)>
<Cash (Producer)>
<Cash (Consumer)>
Discount
Rate
Discout Rate
Change
Wage Rate
Change
Desired
Price
Initial Price
level
Real Wage
Rate
Desired
Wage
Initial Wage
Rate
Wage Rate
Inflation Rate
Price (-1)
Demand for
Money
Effect on
Wage
Expected
Wage Rate
Labor Ratio Elasticity
(Effect on Wage)
<Desired Labor>
<Labor Force>
Delay Time of
Wage Change
<Lending
(Banks)>
<Payment by
Banks>
<Cash out>
<Securities purchased
by Banks>
<Government Debt
Redemption>
<Interest paid by the
Government>
<Government Expenditure>
<Cash Demand>
<Saving>
<Consumption>
<Income Tax>
<Dividends>
<Interest paid by Producer>
<Desired Investment>
<Payment by Producer>
Labor
Ratio
Change in
Wage Rate
<Foreign
Exchange Sale>
<Foreign
Exchange out>
Demand for
Money by Banks
Demand for
Money by the
Government
Demand for
Money by
Consumers
Demand for
Money by
Producers
<Inflation Rate>
Initial
Interest
Rate
Interest Rate
(nominal)
Interest Rate
Desired
Interest Rate
Demand for
Money
(real)
Price
Actual
Velocity of
Money
Money
Ratio
Effect on
Interest Rate
Change in
Interest Rate
Discount Rate
Adjustment
Figure 33: Transactions of Producers
38
<Lending
(Banks)>
<New Capital
Shares>
Cash
Flow
Demand
Index for
Imports
Imports
(real)
Cash Flow Deficit
(Producer)
<Dividends>
<Producer Debt
Redemption>
<Interest paid
by Producer>
Imports
Demand
Curve
Imports
Coefficient
<Initial Foreign
Exchange Rate>
Import
pulse
<GDP (real)>
Import
time
Import
duration
Desired
Borrowing
(Producer)
Cash Flow from
Financing Activities
Cash Flow from
Investing Activities
Domestic Sales
Exports
<Government
Expenditure>
<Interest paid by
Producer>
Investing
Activities
Operating
Activities
Financing
Activities
Cash (Producer)
<Producer Debt
Redemption>
<Direct Investment
Abroad>
<Desired
Investment>
<Payment by
Producer>
<Domestic Sales>
<Lending
(Banks)>
New Capital
Shares
<Foreign Direct
Investment Abroad>
<Exports (real)>
<Dividends>
<Price>
Inventory
Direct Financing
Ratio
Cash Flow from
Operating Activities
Desired
Financing
<Price.f>
<Foreign
Exchange Rate>
Imports
1
<GDP
(Revenues)>
<Investment>
<Consumption>
<Price>
2
Direct Investment
Index
Direct Investment
Abroad
1
Direct Investment
Investment
Desired
Investment
<Desired
Investment
(real)>
2
Direct Investment
Index Table
Direct Assets
Abroad
<Producer Debt
Redemption>
<Corporate Tax>
<Wage Rate>
<Employed
Labor>
<Interest paid
by Producer>
Direct Investment
Ratio
Depreciation
<Price>
<Interest Rate
(nominal)>
Dividends Abroad
1
Dividends
<Dividends
Abroad>
Wages
Tax on Production
Excise Tax
Rate
<Time for Fiscal
Policy>
Producer Debt
Redemption
Producer
Debt Period
Change in Excise Rate
<Depreciation
(real)>
<Corporate Tax>
Capital (PP&E)
<Wages>
<Interest Arbitrage
Adjusted>
Payment by
Producer
<Imports>
2
<Tax on
Production>
Profits for
Dividends
Retained Earnings
(Producer)
Capital Shares
Debt (Producer)
Capital Liabilities
Abroad
Profits
Dividends Ratio
Corporate
Tax
Corporate
Tax Rate
Profits
before Tax
GDP (Revenues)
<Income Balance>
<Depreciation>
<Interest paid
by Producer>
<Wages>
<Tax on Production>
GNP
<Price>
<Dividends
Abroad.f>
<New Capital
Shares>
<Foreign
Exchange Rate>
<Direct Investment
Abroad.f>
<Lending
(Banks)>
<GDP (real)>
Capital Shares
Newly Issued
Foreign Direct
Investment Abroad
Figure 34: Transactions of Consumers
39
<Securities sold
by Consumer>
<Gold
Certificates>
<Interest Arbitrage
Adjusted>
Income Tax
Cashing
Time
Financial
Investment Index
Financial
Investment
Currency
Ratio
Cash
Demand
Saving
<Disposable
Income>
Initial Financial
Assets Abroad
Shares
(held by
Consumer)
<Government
Securities (Banks)>
<Government Securities
(Central Bank)>
<Government Debt
Redemption>
Securities sold
by Consumer
Security Holding Ratio
by Consumer
Initial Security Holding
Ratio held by Consumer
Government
Securities
(Consumer)
<Initial Capital
Shares>
<Government
Securities Newly
Issued>
Securities purchased
by Consumer
<Price>
<Initial Price level>
<Open Market
Purchase
(Public Sale)>
<Time for Fiscal Policy>
Change in Income Tax Rate
Price Elasticity
of Consumption
<Open Market Sale
(Public Purchase)>
Financial
Investment
(Shares)
<Capital Shares
Newly Issued>
Financial
Investment
Abroad
Deposits
Abroad
(Consumer)
1
2
Deposits
(Consumer)
Government
Transfers
Effect on
Consumption
Marginal Propensity
to Consume
Consumption
Basic
Consumption
Financial
Investment Ratio
<Interest Rate
(nominal)>
Currency Ratio
Table
Cash
(Consumer)
Financial Investment
Index Table
Money put into
Circulation
<Income Abroad
(Consumer)>
3
<Income>
Disposable
Income
Income Tax
Rate
Lump-sum Taxes
Change in
Lump-sum Taxes
Initial Gold held by
the Public
Consumer Equity
Distributed
Income
Income
Distribution
by Producers
Income Abroad
(Consumer)
1
Income
<Interest paid by the
Government (Consumer)>
<Interest paid by
Banks (Consumer)>
<Dividends>
<Wages (Banks)>
<Wages>
<Direct and Financial
Investment Income>
<Gold Deposit>
<Depreciation>
<Interest paid by
Producer>
<Income>
<Corporate Tax>
<Dividends>
<Wages>
Figure 35: Transactions of Government
40
Government
Deficit
<Seigniorage>
<Interest paid by
the Government>
<Government Debt
Redemption>
<Tax Revenues>
<Switch
(Seigniorage)>
Government
Crediting
<Switch
(Seigniorage)
Time>
Government
Borrowing
Deposits
(Government)
<Government
Securities Newly
Issued>
Initial Cash
(Government)
Cash (Government)
Time for
Fiscal Policy
Government
Expenditure
Switch
Base Expenditure
Growth-dependent
Expenditure
Change in
Government
Expenditure
Public Money
Expenditure
Change in
Expenditure
<Public Money>
Primary
Balance
<Tax Revenues>
Primary Balance
Ratio
Interest paid by the
Government (Consumer)
Interest paid by the
Government (Banks)
Interest paid by the
Government (Central Bank)
Revenue-dependent
Expenditure
Interest paid by the
Government
<Interest Rate
(nominal)>
<Growth Rate>
<Interest paid by the
Government>
Primary Balance
Change Time
Primary Balance
Change
Government Debt
Redemption
Government
Debt Period
Retained Earnings
(Government)
Initial Government
Debt
Debt (Government)
Debt-GDP ratio
Switch
(Seigniorage)
Time
Tax Revenues
Issue Duration
Issue Time
Seigniorage
Switch
(Seigniorage)
Government Securities
Newly Issued
<GDP
(Revenues)>
<Corporate Tax>
<Income Tax>
<Tax on
Production>
Public Money
<Government
Deficit>
Figure 36: Transactions of Banks
41
2
<Foreign
Exchange
(Banks) (FE)>
<Foreign
Exchange
Rate>
<Interest on
Financial Liabilities
Abroad.f>
<Dividends
Abroad.f>
<Imports>
<Lending
Distribution>
<Exports>
<Foreign Exchange
Purchase>
<Foreign Financial
Investment Abroad>
Lending (Central
Bank and PMA)
<Securities
purchased by
Banks>
<Reserves
Deposits>
<Foreign Cash
out>
<Cash out>
Cash in
<Foreign
Exchange Sale>
Net Gains by
Changes in
Foreign Exchange
Rate
Foreign
Exchange in
<Desired
Borrowing
(Producer)>
<Payment by
Banks>
Cash Flow
Deficit
(Banks)
<Dividends
Abroad>
<Direct Investment
Abroad>
<Borrowing
(Banks)>
Desired
Borrowing
(Banks)
<Adjusting
Reserves>
2
2
2
<Interest Income
(Banks)>
<Producer Debt
Redemption>
<Securities sold
by Banks>
<Deposits in>
Net Gain
Adjustment Time
Foreign
Exchange
(Book Value)
Direct and Financial
Investment Income
<Foreign Financial
Investment
Abroad>
<Foreign Direct
Investment Abroad>
Vault Cash
(Banks)
Foreign
Exchange
(Banks)
3
Cash out
<Excess
Reserves>
<Foreign Exchange
Sale>
Foreign Cash out
Payment
by Banks
<Desired
Borrowing
(Producer)>
Lending (Banks)
Loan
(Banks)
3
Security Holding
Ratio by Banks
Government
Securities
(Banks)
3
Required
Reserve
Ratio
Excess Reserve
Ratio
<Borrowing
(Banks)>
<Banks Debt
Redemption>
<Switch
(Seigniorage)>
<Government Securities
(Central Bank)>
Interest paid
by Banks
(Consumer)
Deposits
(Banks)
Net Deposits
Debt
(Banks)
Financial
Liabilities
Abroad
Interest paid
by Banks
<Interest on
Financial Liabilities
Abroad>
Retained
Earnings
(Banks)
Interest paid
by Producer
Profits (Banks)
<Net Gains by
Changes in Foreign
Exchange Rate>
<Interest paid by
Banks>
<Interest paid by the
Government (Banks)>
<Loan (Banks)>
Prime Rate
Premium
<Lending (Public
Money)>
<Saving>
Interest Income
(Banks)
<Debt (Banks)>
Discount Rate
<Financial Investment
Abroad.f>
<Foreign
Exchange Rate>
<Lending (Central
Bank)>
Prime Rate
Deposits in
Borrowing
(Banks)
Foreign Financial
Investment Abroad
Interest on Financial
Liabilities Abroad
<Interest Rate
(nominal)>
Interest paid
by Banks
(Central Bank)
2
Wages (Banks)
<Financial
Investment Abroad>
Banks Debt
Redemption
Deposits out
Banks Debt
Period
<Financial
Investment
(Shares)>
<Securities
purchased by
Consumer>
<Cash
Demand>
<Government Debt
Redemption>
<Government
Securities (Consumer)>
Securities sold by
Banks
<Open Market Sale
(Banks Purchase)>
<Producer Debt
Redemption>
RR Ratio Change Time
<Initial Required Reserve Ratio>
Excess Reserves
<Open Market Purchase
(Banks Sale)>
Lending (Central
Bank-Reserves)
<Interest Rate
(nominal)>
<Switch (Seigniorage)>
RR Ratio
Change2 Table
RR Ratio Change
RR Ratio Change2
Required
Reserves
<Lending
Distribution>
Open Market
Operations
Reserves
(Banks)
<Financial
Investment Abroad>
3
<Direct Investment
Abroad>
<Imports>
<Foreign
Exchange in>
<Government Securities
Newly Issued>
Securities
purchased by
Banks
Reserves
AT
Adjusting
Reserves
Reserves
Deposits
<Deposits out>
3
<Interest on Financial
Liabilities Abroad>
<Foreign Exchange
Purchase>
Foreign
Exchange out
Foreign Direct and
Financial Investment
Income
<Dividends
Abroad>
Figure 37: Transactions of Public Money Administration (Central Bank)
42
Foreign Exchange
Lower Bound
<Exports>
<Government Securities
(Consumer)>
Seigniorage
Assets
<Foreign
Exchange Rate>
Foreign
Exchange
Reserves
Foreign Exchange
Upper bound
<Imports>
Foreign Exchange
Sale
<Government Securities
(Banks)>
Open Market
Public Sales Rate
Open Market
Sale Time
Open
Market Sale
(Banks
Purchase)
<Government Debt
Redemption>
Open Market
Sale Operation
Open Market Sale
Securities sold by
Central Bank
Open Market Sale
(Public Purchase)
Initial Sequrity Holding
Ratio by Central Bank
Government
Securities
(Central Bank)
Security Holding Ratio
by Central Bank
<Open Market Sale
(Public Purchase)>
Banks Debt Redemption
(Central Bank)
Decrease in
Reserves
Monetary Base
Notes Withdrown
<Interest Income
(Central Bank)>
<Foreign
Exchange Sale>
<Banks Debt
Redemption>
Banks Debt Redemption
(Public Money)
<Government
Securities (Banks)>
Discount Loan
(Central Bank)
<Switch
(Seigniorage)>
Open Market
Purchase
(Banks Sale)
Foreign Exchange
Purchase
Open Market
Purchase Time
Open Market
Purchase
Operation
Open Market
Purchase
Gold
Initial Gold held by
the Public
<Government
Securities (Consumer)>
Lending
(Central Bank)
Window
Guidance
Lending (Public
Money)
<Seigniorage>
Gold Deposit
Securities purchased
by Central Bank
Growth Rate of
Credit
Desired
Lending
Open Market
Purchase
(Public Sale)
<Government Securities
Newly Issued>
Lending (Central
Bank)(-1)
Lending
Period
Lending
Time
Lending by PMA
(Central Bank)
<Desired
Borrowing
(Banks)>
Deposit Time
Gold Standard
Gold Deposit by
the Public
Retained
Earnings
(Central Bank)
Reserves
(Central Bank)
<Lending
(Public
Money)>
<Open Market
Purchase
(Banks Sale)>
<Lending
(Central
Bank)>
<Interest paid by the
Government (Central Bank)>
<Interest paid by
Banks (Central Bank)>
Interest Income
(Central Bank)
Increase in
Reserves
<Adjusting
Reserves>
<Reserves
Deposits>
<Vault Cash
(Banks)>
Reserves by
Banks
<Securities
purchased by
Central Bank>
Gold Certificates
<Foreign Exchange
Purchase>
Lending
Distribution
Notes Newly
Issued
<Open Market
Purchase (Public
Sale)>
<Seigniorage>
Currency Outstanding
(-Vault Cash)
Currency
Outstanding
<Government
Crediting>
Reserves
(Government)
Figure 38: Foreign Exchange Market
43
<Imports.f>
Supply of Foreign
Exchange
<Financial Investment
Abroad.f>
<Direct
Investment
Abroad.f>
Exports (Foreign
Imports)
Effect on Foreign
Exchange Rate
Desired Foreign
Exchange Rate
Initial Foreign
Exchange Rate
Foreign
Exchange Rate
Foreign
Exchange
Ratio
Expected
Change in
FER
Real Foreign
Exchange Rate
<Direct
Investment
Abroad (FE)>
standard
deviation
mean
seeds
<Price.f>
<Price>
<Exports.f>
Demand for Foreign
Exchange
<Financial
Investment
Abroad (FE)>
Adjustment Time of
Foreign Exchange
Expectation
Change in Expected
Foreign Exchange Rate
Ratio Elasticity (Effect on
Foreign Exchange Rate)
Expected
Foreign
Exchange Rate
Foreign Direct and
Financial Investment
Income (FE)
Foreign Exchange
out (FE)
Imports (Foreign
Exports)
<Foreign Exchange
<Foreign Direct and
Purchase>
Financial Investment
Income>
Foreign Exchange Purchase (FE)
Initial Foreign Exchange
Holding Ratio
FF Ratio
(Revised)
Change in Foreing
Exchange Rate
Adjustment Time
of FE
Foreign
Exchange
(Banks) (FE)
Foreign Exchange
Reserves (FE)
Foreign Exchange Sale (FE)
<Foreign
Exchange Sale>
Direct and Financial
Investment Income (FE)
Foreign Exchange
in (FE)
Initial Foreign
Exchange (FE)
<Arbitrate
Adjustment Time>
Interest
Arbitrage.f
Expected Return on
Deposits Abroad.f
Expected Return on
Deposits Abroad
Interest
Arbitrage
Arbitrate
Adjustment Time
Interest
Arbitrage
Adjusted.f
<Interest
Rate.f>
<Expected Foreign
Exchange Rate>
<Foreign
Exchange Rate>
<Interest
Rate>
Interest
Arbitrage
Adjusted
Figure 39: Balance of Payment
44
Balance of
Payments
Current Account
Capital &
Financial
Account
Goods &
Services
Financial
Account
<Financial
Investment
Abroad>
<Direct
Investment
Abroad>
<Foreign
Exchange
Purchase>
<Foreign Direct
and Financial
Investment
Income>
Earnings out
<Imports>
Earnings in
<Exports>
<Changes in
Reserve Assets>
<Other
Investment>
Liabilities
Abroad
Assets
Abroad
<Foreign
Exchange Sale>
Direct and Portfolio Investment
Income Balance
Retained
Earnings and
Consumer
Equity
Service Income
Inventory
(Trade)
Trade Balance
<Exports>
<Foreign
Financial
Investment
Abroad>
<Direct and Financial
Investment Income>
<Foreign Financial
Investment Abroad>
<Foreign
Exchange Sale>
Changes in
Reserve Assets
Foreign
Exchange
(Banks)
Net Foreign
Exchange (Banks)
<Net Gains by Changes in
Foreign Exchange Rate>
Foreign
Exchange in
Other Investment
(Debit)
Other Investment
<Foreign Exchange
Purchase>
Foreign
Exchange out
Other Investment
(Credit)
<Foreign Direct and
Financial Investment
Income>
<Financial
Investment Abroad>
<Direct Investment
Abroad>
<Imports>
(FE Deposits Abroad
for Payment)
Debit (- Foreign Payment)______________ Credit (+ Foreign Receipt)
(FE Receipts from
Abroad)
<Foreign Direct
Investment Abroad>
<Foreign
Direct
Investment
Abroad>
<Direct and
Financial
Investment
Income>
Debit (- Payment)________________________ Credit (+ Receipt)
Figure 40: Simulation Panel of GDP
45
2 Yen/YenReal
0.04 1/Year
2
4
3
5
4
1
3
2
6
5
4
8
2
1
4
3
10
5
6
1
12
3
2
1
2
4
3
5
6
1
14 16 18
Time (Year)
5
4
6
-0.5
20
1
2
11
2
2
1
1
322
Primary Balance Change Time
1
1
2 2
Primary Balance Change
Base Expenditure
1
3ULFH&XUUHQW
,QWHUHVW5DWH&XUUHQW
1
2
2
2
1
1
50
0.5
1
1
120
2
2
1
2
2
1
2
2
1
-10
-0.05
-40
1
2
343
"GDP (real)"
2
2
3
20
5
4
6
22
2
1
4
3
24
2
2
1
1
2
2
1
2
365
2
1
1
2
2
1
"Change in Lump-sum Taxes"
Change in Excise Rate
1
26
2
3
5
4
28
1
6
2
4
3
30
30
0.15
40
0
-0.1
0
0
2
4
3
5
1
4
2
4
3
6
5
1
2
8
4
3
0
2
1
2
3
4
1 2
3
6
1 2
2
3
8
1
2
1
3
5
1
10
2
4
3
12
5
1 2
3
1
2
3
3
1 2
1 2
3
1
2
4
5
1
3
2
4
5
1
3
1
5
1
2
3
2
1
3
2
4
2
3
3 1 3
2
5
1
14 16 18
Time (Year)
3
1 2
4
3
2
0.1
Independent <---> Revenue-dependent
Switch
Corporate Tax Rate
Change in Income Tax Rate
0.3
50
1
0
0
0
0
0
5
1
20
4
5
2
3
4
5
22
3
1 2
0
1
2
3
24
0
1
4
5
1
4
3
2
4
5
5
28
3
2
4
5
0
2
1
30
Delay Time of Wage Change
"Labor Ratio Elasticity (Effect on Wage)"
Delay Time of Price Change
10
2
2.4
1
2
"Switch (Seigniorage) Time"
"Switch (Seigniorage)"
Government Debt Period
Weight of Inventory Ratio
4
2
4 5 1
2 3
1
3
1
5
2
3
5
1
2
3 5
1
4
1
0.5
0
0
30
1
1
0
3
5
2
3
4
Issue Duration
Issue Time
1
4
5
5 1 3
2
Public Money
4
1
4
"Cost-push (Wage) Coefficient"
Labor Market Flexibility
Velocity of Money
Delay Time of Interest Rate Change
3
0.68
2
4
10
2
5 1
1.5
20
0.1
2
"Money Ratio Elasticity (Effect on Interest Rate)"
1
50
500
2
7LPH<HDU
4
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1
1
1
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Initial Government Debt
<HQ<HDU
<HQ<HDU
<HQ<HDU
<HQ<HDU
<HQ
26
1
"Output Ratio Elasticity (Effect on Price)"
10 12 14 16 18 20 22 24 26 28 30
Time (Year)
1
1
1
1
1
1
3HUVRQ
2
2
2
2
2
2
2
3HUVRQ
3
3
3
3
3
3 3HUVRQ<HDU
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3
Time for Fiscal Policy
3
'HVLUHG/DERU
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(PSOR\HG/DERU&XUUHQW
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60 Person
-0.4 Person/Year
70 Person
-0.2 Person/Year
80 Person
0 Person/Year
90 Person
0.2 Person/Year
0
2
1
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3
3
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'HEW*RYHUQPHQW&XUUHQW
5
0 Yen/Year
0 Yen
20 Yen/Year
100 Yen
40 Yen/Year
200 Yen
60 Yen/Year
300 Yen
80 Yen/Year
400 Yen
100 Person
0.4 Person/Year
<HQ5HDO<HDU
<HQ5HDO<HDU
<HQ5HDO<HDU
<HQ5HDO<HDU
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386
1
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<HDU
2
1
5
6
Change in Government Expenditure
1
1
$'&XUYHDQG,QWHUHVW5DWH,6/0
0 Yen/YenReal
0.01 1/Year
300
0.5 Yen/YenReal
0.0175 1/Year
1 Yen/YenReal
0.025 1/Year
1.5 Yen/YenReal
0.0325 1/Year
1
0
2
1
6
1
1
1
1
1
1
1
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2
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150 YenReal/Year
-0.4 1/Year
300 YenReal/Year
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450 YenReal/Year
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6
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Figure 41: Simulation Panel of Trade and Investment Abroad
1
0
0
0
1
3
2
1
2
3
4
4
5
3
2
1
6
4
5
1
6
5
4
2
3
6
5
1
6
7
4
2
3
8
5
1
6
5
1
4
2
3
9 10 11
Time (Year)
4
2
3
6
12
5
1
6
13
4
2
3
14
5
1
6
15
4
3
2
0
1
2
2
1
2
4
1
2
1
6
2
1
2
0.3
0
standard deviation
mean
-0.1
seeds
100
"Imports Coefficient.f"
Imports Coefficient
2
1
2
1
2
1
0.2
2
0.1
1
0.2
2
8
10
12
Time (Year)
1
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0
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18
1
0
2
3
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1
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4
3
2
Direct Investment Ratio
"Financial Investment Ratio.f"
Financial Investment Ratio
0.2
0.2
0.2
0.2
18
5
1
6
4
3
2
19
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2
4
3
3
1 2
2
3
3
1
2
3
1
2
3
1
2
3
3
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8
10 12
Time (Year)
3 1
2
0
1
3
2
1
2
3
1
2
3
2
3
1
4
2
3
1
5
2
1
3
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6
2
1
7
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3
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8
3
1
2
2
3
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3
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3
1
9 10 11 12 13 14
Time (Year)
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1
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Initial Financial Assets
2,000
2,000
Adjustment Time of FE
0
1
2
2
4
3
1
2
4
3
4
1
6
3
2
4
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0
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4
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1
1
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2
2
0
2
1
2
1
2
1
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4
1
2
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2
3
1
3
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2
3
1
2
3
1
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1
2
1
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2
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1
2
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10
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Time (Year)
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1
1
2
14
2
2
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3
1
3
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Time (Year)
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3
1
2
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1
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1
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References
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Monetary
Institute,