Economic Analysis Series No.157
The EPA Short-Run Macroeconometric Model of the Japanese Economy
-Basic Structure, Multipliers, and Economic Policy Analyses-

October, 1998
Masahiro Hori
Susumu suzuki
Osamu Kayasono

The full text is written in Japanese.


This ANALYSIS is composed of two parts. The first part, a paper titled The Short-Run Macroeconometric Model of the Japanese Economy-Basic Structure and Multipliers, is an introduction to the newly released EPA model of the Japanese economy. The model is a quarterly based econometric model developed to analyze flexibly the short-run aspects of the Japanese economy with the latest data, and has a much simpler structure than that of the Japanese model in the EPA World Economic Model 5th Version (Masubuchi et al. [1995]). The second part, Historical Transition of Fiscal Multiplier and Structure of Macro Models, is a daring use of our model to settle an important polemical policy issue. It argues that the widely diffused assertion that the short-run fiscal multiplier in Japan is getting smaller is just a figment of model structures.

I.  The Short-Run Macroeconometric Model of the Japanese Economy: Basic Structure and Multipliers

The model is basically a demand-oriented, traditional Keynesian-type model with the IS-LM-BP framework; however, it adopts current progress in econometrics, such as unit-root, co-integration, and error-correction. Although the use of the new techniques improves the model's statistical legitimacy, and its simpler structure makes our analysis more flexible, those alterations do not cause large changes in the short-run properties of the model.

The followings are some of the properties of the results of our policy simulations. The peak of fiscal multiplier, i.e., the effect of government investments of GDP, is about 1.3 in Japan. The effect of income-tax reduction is smaller due to its leak to household savings. Monetary policy takes some time before its effects become evident.

II.  Historical Transition of Fiscal Multiplier and Structure of Macro Models

The second paper concentrates on the polemical proposition that the Keynesian multiplier of government investments in Japan declined after the burst of the bubble economy in the late 1980s. First, it derives theoretical formulae to describe the fiscal multiplier in our flexible price setting, and sorts out conceivable channels of multiplier decline. Second, it empirically examines the validity of the proposition. Through a multi faceted inquiry, especially through a multiplier comparison among models with exactly the same specification and with different data periods, it argues that the proposition is just a figment of model builder's conversions and is not empirically established.

Chart = Effects of Macroeconomic Policies in Japan of Real GDP
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