ERI Discussion Paper Series No.64
Development of the ERI compact model

April 1996
Kenichi Kawasaki
(Economic Research Institute, Economic Planning Agency)
Masahiko Tsutsumi
(Economic Research Institute, Economic Planning Agency)


The EPA World Economic Model has played an important role in analyzing the interdependency of the world economy in general, and of the largest economies in particular, mainly in the field of macroeconomic policy coordination. However, recent economic affairs have been more concerned with structural issues in trade and employment. The Dynamic Asian Economies are emerging as significant players on the world stage. The role of macroeconomic model simulations needs to be reviewed.This paper describes a challenge to develop a smaller macroeconomic model in an efficient manner. Streamlining of modeling works may allow further studies in structural issues and emerging economies. Model properties are least affected by simplification of the model itself. A larger model with several variables is useful to describe economic developments in detail. However, it is not always efficient to analyze developments in key economic variables. Important issues for consideration remain. Models should be validated using actual data. Full-model simulation is a crucial aspect that should be undertaken whether parameters are estimated or "guesstimated". On the other hand, a model that exercises certain economic theories and that describes likely economic developments in an empirical manner should be distinguished. In any event, the theoretical framework of the model should be determined in light of the purpose of the model. What is most important is to understand the limits rather than the merits of a model. "If people run after two hares, they will catch neither.

Structure of the whole text

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  2. Abstract
  3. page1
    I. Background
  4. page2
    II. Roles of Macro Econometric Models
    1. page2
      a. Simulation
    2. page3
      b. Empirical Analyses
    3. page3
      c. Projections
  5. page5
    III. Basic Structure and Properties of a Compact Model
    1. page5
      a. Outline of the Current EPA Model
    2. page6
      b. Streamlining the Larger Model
    3. page8
      c. Structure of a Compact Model
    4. page9
      d. Projections
    5. page10
      e. Remaining Issues for Consideration
  6. page15
    IV. Practical Affairs
    1. page15
      a. Date Base
    2. page15
      b. Computer System
  7. page17
    V. Concluding Remarks
  8. page21
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