Macro-econometric Models and the Outline of the MEAD-RIETI Model

The global financial crisis, triggered by the subprime mortgage problem and resulting in the collapse of a major American investment bank in September 2008, has seriously affected the Japanese economy. The Japanese government has instigated certain policies in response to the global economic recession and volatility in financial markets. In formulating policies, it has become increasingly necessary to forecast different economic scenarios by taking into account the possible impact of policies and risks, including contributing factors from abroad. Using macro-econometric models is one way to respond to this. In recent years, the governments, central banks and international organizations of many nations have placed more emphasis on aligning their macro-econometric models with macroeconomic theory, in order to better respond with the “Lucas Critique.” This paper will attempt to achieve two things: 1) to illustrate the macro-econometric models of foreign countries and Japan and the macroeconomic theory behind those models, and 2) to explain the “MEAD-RIETI Model” (MRM) which we have constructed. While the aim of the MRM is to evaluate quantitatively the risks and impacts of policy decisions, it is a hybrid model which attaches a high degree of importance to how it fits with empirical data considering the consistency of the model with macroeconomic theory. Although MRM comprehensively covers SNA and other key economic variables, MRM prefers simplicity over complexity with regards to model specification and avoids the use of too many variables.