Building a New Macroeconomic Model and Policies in Times of Economic Crisis
(Formerly known as Maintaining Economic Dynamism under the Adverse Demographic Conditions of Low Fertility and Aging Population)

2009 - 2010

This project aims to develop a quantitative business-cycle model (macroeconomic model) for analyzing macroeconomic policies during a global financial crisis. Financial problems including those with the financial system and asset-based lending will be explicitly incorporated into the model. The goal of research is to contribute to the evaluation of macroeconomic policies by performing simulations with the model. As an attempt to develop new theories, search theory and monetary theory (particularly, the framework of Lagos and Wright) will be used to develop a new general equilibrium model capable of describing banking and financial crises. In addition, further research will be pursued on business cycle accounting (BCA) in an ongoing effort that began in fiscal 2005 (April 2005 through March 2006). In order to improve the usefulness of BCA as a practical analytical tool, research will be undertaken to explore its limitations and find possible ways for overcoming them. With the collapse of the post-Cold War pattern of economic growth, in which the financial sector-led U.S. economy continued to drive the global economy by serving as the ultimate consumer, global economic management is expected to undergo drastic changes in both practical and conceptual terms. In light of this prospect, this project aims to undertake broadly based research to explore possible future growth mechanisms for the global economy, thereby indentifying the role of East Asia in that framework and setting the direction for Japan in rebuilding its economic and industrial structures.

Research themes addressed by this project are broadly classified into the following four categories:

• I.   Development of a quantitative business cycle model and business cycle accounting (BCA)
• II.  Comparative weighing of financial stabilization policies derived from the banking crisis model and macroeconomic policies
• III. Policies in times of economic crisis and economic structural changes in times of transition
• IV.  Other related studies

2008

The purpose of this project is to develop a quantitative business-cycle model (macroeconomic model) for analyzing macroeconomic policies during a global financial crisis. The financial system, asset-based lending and other financial factors will be explicitly contained in the model. This model will be used in running simulations with an aim to contribute to the evaluation of macroeconomic policies. New attempts will also be made in the area of theoretical development. Specifically, search models and models containing market imperfection will be used in developing a new general equilibrium model for analyzing the impact of macro-stabilization policies. Furthermore, the project will consider Business Cycle Accounting (BCA), which it has been developing since fiscal 2005. To improve the usefulness of BCA, research will be conducted on the limitations of analytical methodology of BCA and possible ways for overcoming them. The post-Cold War pattern of global economic growth may be described as having derived its locomotive power from the financial sector-led U.S. economy that has consistently functioned as the "final consumer." But with the collapse of this pattern, global economic management will probably undergo major changes now in both practical and conceptual terms. In this context of change, this project will undertake broadly based studies and research on such issues as the future structures of global economic growth, the role of the East Asian region in this framework, and desirable directions in Japan's future economic and industrial structures.

2007

The purpose of this project is to create a quantitative business-cycle model (macroeconomic model) to analyze developments in the Japanese economy and developments in the U.S. economy as it is impacted by the subprime loans problem, and to use the model to run simulations to evaluate macroeconomic policies. In particular, the project will focus on the impact of news shocks (news and expectations pertaining to future economic conditions) on business conditions, and on changes in business conditions under the assumption that the economy can converge toward an infinite number of stable equilibriums. In this context, we will further refine the Business Cycle Accounting (BCA) methodology that we have been working on since fiscal 2005. Furthermore, we shall examine the policy responses needed to normalize the economic system in the event of a military emergency and other crises. This will be based on the analysis of case studies gathered from various countries and a number of hypothetical scenarios.

July 1, 2007 -