Macro-model analysis of Japan’s economic and fiscal conditions: Analysis by the Office of Econometric Analysis for Fiscal and Economic Policy, Policy Research Institute, Ministry of Finance

The Office of Econometric Analysis for Fiscal and Economic Policy, Policy Research Institute, Ministry of Finance has three backwards-looking macro-econometric models. The first is a general equilibrium model. This is an IS-LM Phillip’s curve model, and its main demand factors are based on Error Correction Models (ECM). Each demand factor has a mechanism of gradual convergence to long-term equilibrium. As such, the model is suited to projecting mid- to long-term economic and fiscal paths. The second model is a partial equilibrium model. This model takes various (socio) economic variables—such as GDP, interest rates, and population in the future—as exogenous, and then base these exogenous variables to gain fiscal paths. The model is suited to examining long-term fiscal conditions and fiscal sustainability. The third model is NiGEM, developed by NIESR. NiGEM is similar to the general equilibrium model in that it is centered on ECMs, while the structure for the fiscal sector is simpler than the general equilibrium model. On the other hand, NiGEM is a multi-national model involving 44 countries, including Japan, so it has an advantage of analyzing the effects of economic shocks from overseas, as well as the mutual relationships between Japanese economy and the economies in other countries.