ISSN O075-6407

KOBE
ECONOMICBUSINESS&REVIEW
32nd

ANNUAL REPORT

ss"VTE'-Oeeg,,[[El.../ev

RESEARCH INSTITUTE FOR ECONOMICSAND BUSINESS ADMINISTRATIONKOBE UNIVERSITY
1986

KOBE

ECONOMIC & BUSINESSREVIEW
32nd
ANNUAL REPORT;'`i'E'"il13s
g:s

,.e-.

RESEARCH INSTITUTE FOR ECONOM[CSAND BUSI]NESS ADMINISTRATIONKOBE UNIVERSrl'Y

1986

CONTENTS

Import Demand Structural Change in theBasin Countries.................................

Pacific..............,Seiichi KATAyAMA

Kenichi IsHiGAKi

1'
A Synthetic Analysis of Structuralist andMonetarist

Theory of Latin American Inflation...

..................Shoji NIsHIJIMA

15

Stagflation Causes and Policies ••.

..................Nobuo OKIsHIo

33

A Computable General Equilibrium Modelof theJapanese Economy ............................

...................Mitsuo EzAKi

55

IMPORT DEMAND S'IRUCTURAL CHANGE
IN THE PACIHC BASIN COUNTRIES*
by
Selichi KATAyAMA*" and Kenichi IsHIGAKI

1. Introduction
The purpose of the present paper is to investigate the structural change
in the import demand of Pacific basin countries.
Needless to say, international trade is important not only in theworld economy but for macro-economic policy issues in a country. As
is well summarized by Goldstin and Khan (1985), the estimation of
trade equations that means equations for the time-series behavior of thequantities and prices of merchandised imports and exports, has still its

importance. And one of the econometric issues in trade modelling is
the stability of trade relationships. Whether a regression relationshipvaries or stable overtime is obviously important from a predictive andanalytical point of view.

There are many literatures on the structural change in trade equa-tions. [For example, Heien (1968), Joy and Stolen (1975), Stern,

Baum and Green (1979) and Volker (1982)]. Recently Katayama,
Ohtani and Toyoda (1985) examined the stability issues by applying
the Bayesian method. In their paper, the main issue is to investigate
the structural change in the 1970's that includes the breaking out of
the first oil crisisl) Although the exogeneous shock such as oil crisis is important, there seems another factor which gives an impact tostructure, for example, taking off to rapid economic growth in Japanin the 1960's. Therefore, we will extend the observation periods totwQ decades, from the 1960's to the 1970's.
The method of the test for structural change is the Bayesian test.
To detect a change point in a linear regression, Quandt (1958) proposed*We thank to Professors T. Toyoda and K. Ohtani. Professor Ohtani
gave us many suggestions which improved much the present paper. The earlier
draft of the present paper was read at the workshop of Kobe University. We
were benefited from the discussion there and the comments from Professor M.
Saito. However, the whole responsibilities are ours.

**Associate Professor, Kobe University of Commerce. A member of the
Research Group for Comparative Economic ' Studies, RIEBA, Kobe University.
1)In their paper, Katayama, Ohtani and Toyoda (1985) examined theexport demand structure also.

2 SEllCHI KATAYAMA AND KENICHI ISHIGAKI
the switching regression model and Brown, Durbin and Evans (1975)
proposed the Cusum test. But, it is assumed in their models that thechange in parameters occurs abruptly. The switching regression modelthat can deal with the gradual change in parameters has been proposed by

Bacon and Watts (1971) and Tsurumi (1980). However the end-pointof the gradual change can not be estimated explicitly in their model.
Therefore, we will apply the alternative gradual switching regression
model by Ohtani and Katayama (1985), in which the end-point can be
explicitly estimated.

These results are compared with those which are obtained by the
maximum likelihood (ML) method with autocorrelated error terms recently
developed by Ohtani and Katayama (1986). Economic variables overtime
have often autocorrelation. Hence the comparison with the estimates by
the method has its meaning. This is the second purpose of this paper.
In the next section we will briefly explain their methods.

2. The Models
At first we will use the fundmental aggregate import equation employedin Houthakker and Magee (1969). And by applying the alternative
method to this equation, we will explain how to detect the structuralchange. For details, see Ohatani and Katayama (1985).
Import equation :logMt =Pilog Yt+ P21og PMt +fl3+ et (1)where the subscript, t, represents a time andMt = quantity of imports demanded in the importing country,
Yt = real gross domestic product of the importing country,
PMt = ratio of the price of imports to the domestic price level,
et = error term. We assume that this term distributes as thenormal distribution with mean zero and constant varianceo2.
Note that fli is interpreted as the income elasticity and P2, is inter-

preted as the price elasticity of imports. The gradual switching regression models for this equation employed in this paper are written as

logMt=(Bi+6iRt)logYt+(fl2+622t)logPMt+(P3+S3Rt)+Et. (2)In the above model, it is assumed that the regression coefficients
shift from B to fl+6 along the transition path, 2t , defined as

IMPORT DEMAND STRUcrURAL CHANGE 3

IN THE PACIFIC BASIN COUNTRIES

Rt=O fort=1,2, •-,ti',at=(t-ti")/(t2"-ti") fort=ti*+1, •••,t,*-1, (3)at=1 fort=ti t2*+1, •••, T.
The parameters ti*, represents an end-point of the first regime(in other words, a start point of the gradual change), and the parameter, t2", represents a start-point of the second regime (in otherwords, an end-point of the gradual change). Note that if the null hypotheses, He:6i=O(i-- 1, 2, 3), are accepted in the test, we judge
that there is no structural change. Since the sampling properties ofthe estimators of parameters in this gradual switching regression model
are not known, we use the Bayesian method in estimation of parameters.
Assuming the appropriate non-informative priors on parameters, we canobtain the posterior distributions of parameters to be estimated. And

we can get the Bayesian point estimates of parameters (i.e. posterior means), and we can make the tests the hypotheses, He : Pi -- O andH,: 6i=O(i= 1, 2, 3).

Next we will briefly explain the method to detect the structuralchange when the error terms are autocorrelated. For detail, see Ohtani
and Katayarna (1986).
Iog Mt == (fii+6i2t) log Yt+(fi2+62Rt)log PMt+(P3+S3Rt) +zat

<4)

Ut = pUt-i +Et ; et - NID ( o, o2)

Where ut is an error term which consists of the first order autoregressive scheme with a parameter p. The transition path, 2t is defined the same as (3). The ML estimates ti*, t2" and p, say t"i", t"2*

and i can be obtained as through the ordinary procedure. Conditional on the estimated parameters t"i*, 22* and i we can make the tes2t)

for the hypotheses Ho:Pi=O and H,:6i=O(i=1, 2,3), and Ho:p= O.

3. Empirical Results
Using the quarterly data whose source and the definition are shown in
the Appendix, we examined the structural change of import equation of2) The critical region of the large sample likelihood ratio (LR) testwith ct percent level for the null hypothesis, H :p= O, can be written as
Lmax(ii', i2*, fi) - Lmax(t"i ii p= G) > X?(ct)/ 2

2 Xi(a) is the upper ct percent critical value of the chi-square distribuwheretion with degree of freedom 1. See Ohtani and Katayama (1986).

4 SEfiCHI KATAYAMA AND KENICHI ISHIGAKI
the five countries: U.S.A.(US), Canada(CA), Japan(JA), Korea(KR) and Australia (AL).
The results of applying the Bayesian inference to the gradualswitching model are shown in Table 1 and 2. In the tables, the posterior means for parameters are shown and the values in parentheses below
the estimates of coefficients are posterior standard diviations. (**)
means that the hypothesis Ho:fii--O and H,: Si=O(i= 1, 2, 3) are rejected at the 5% level by the Bayesian one-sided test, and (*) meansthat they are rejected at the 10% level. Note that, although the estimates of the end-point of the first regime and the start-point of thesecond regime (i.e., ti' and t2" ) are shown in the table, these estimates
are meaningless if all the tests for Ho: 6i=O, H,: 62=O and Ho: 63 == O•
are accepted. We also note that, although the posterior distribution ofti" and t2" for the equation are not flat, there is the case that we can
not judge that the structural change occurred in the equation since thehypotheses H,:Si=O (i=1, 2, 3) are accepted.
From the results in the Table 1 and 2, we see the following
facts. First, all five countries have experienced the structuralchange in the import equation in the 1960's and/or the 1970's, US in

the 1960's, CA and KR in the 1970's, JA and AL in the 1960's
and 1970's. The relation between the breaking out of the first oilcrisis and the structural shift can not be observed clearly. Japanese
structural shift started earlier than the time of breaking out of thecrlsls.

Second, the spans of adjustment to the structural change aredifferent. For JA and AL, the time period of adjustment isshort. KR had shown no structural shift from 1965 to 1969.3) Therefore, as was pointed out by Katayama, et al. (1985), KR started herchange early in the 1970's and it is judged to be continuing in thedecade.

Third, Stern, Bauml and Green (1979) found weak evidence ofstructural change for US imports in the mid to late 1960's and muchstronger evidence in the first quarter of 1972 and thereafter. Volker(1982) re-examined it and showed that there has been no significant
change. In our test for the hypothesis H,:6i =O (i=1, 2, 3) were accepted in two decades and we judge no structural change for US importequation. This supports the Volker's result.
3) Note that as for Korea, the observation period is restricted to from1965 to 1980 by the date availability.

JMPORT DEMAND S'IRUCTURAL CHANGE 5

IN THE PACIFIC BASIN COUNTRIES

4. Comparison of the two different estimates
In this section we will cornpare the estimates by Bayesian method withthose by ML method. The comparison is limited to the estimated results based on the date from the first quarter of 1970 to the fourth
quarter of 1980.

As an example, by using US data, we have computed the values of
the concentrated log-likelihood, L.ex (ti*, t2", p), and found that
the ML estimates of ti", t2', and p are ti*=10, t2"=23 and p=O.5.
(See Table 3). The large sample Iikelihood ratio (LR) test with
5% level for the null hypothesis, H,:p=O is rejected. The estimatesof other parameters conditional on ti", t2* and p are shown in Table 4.
From the table, we see that the hypothesis, Ho:p= O, can not be accepted by the Durbin-Watson test. By incorporating possible autocorrelated error terms, the fact that Ho:6i =O(i= 1, 2, 3) can not be accept-

ed does not change. This means that the structural shift occurredboth in price and income elasticities in US. The conditional t-values
for the estimates S,(i= 1, 2, 3) that are the values in the parentheses
under the estimates are decreased, although they are still significant

at 5% level. The results by applying the ML method are shown in
Table 5. Note that LR test for the hypothesis H,:p--O was accept-

ed for JA and KR. From Table 5, we see that the hypothesis,
H,:p==O, can not be accepted by the Durbin-Watson test for four
countries and, as for KR, the possible autocorrelation is indeterminate.
Note that CA shows the negative autocorrelation.

By examinig the results on Table 1 and 5, we see the following
facts. First, US shows the strong evidence of structural shift inthe second quarter of 1972 and thereafter by ML method. On the contrary, the Bayesian method does not show it. ML estimates support
the Stern, Baum and Green (1979) argument. CA shows the structuralchange both in price and income elasticities by ML estimate method.
Bayesian estimates show the weak evidence in the structural change inprice elasticity nearly the same time. KR shows the weak evidence instructural shift in income elasticity by ML estimate, but not by
Bayesian estimate. On the whole ML method seems to capture sharply
structural shift than Bayesian method.
Second, when the structural change is found, the time of the changes
i.e., ti", and ti and the spans of adjustment time are not exactly thesame but do not differ very much by the both methods. As is pointed out
by Katayama et. al. (1985), the strinctural shift in KR might be on

6 SEllCHI KATAYAMA AND KENICHI ISHIGAKI
the way in the sample period from the posterior distribution of ti" andti This point is the sarne by ML estimates of KR data. The change
points ti* and t2* stay at near two extremes.

Finally, we need a few comments on the estimated coefficients.
First, the signs of 3i and Pi+6i expected from the theory are positive as long as the imports is not an inferior good and the signs of P2
and fi2+S2 are negative. Both ML and Bayesian estimates show a theoretically correct sign after the structural shift. However, as for prechange period, several countries have a positive sign of the price elasticities although some of them are at insignificant level, for example, CA

and AL in Bayesian estimates and US and AL in ML estimates. The
possible adjustment process of both the price and income effect in trade

has been neglected in both methods. This might have caused biases of
estimates of parameters.
Second, two different methods of the estimation give the different
results. The problem is which result reflects better the real fact. At
this stage, we can not say anything about it. However, the more studies
on the same problem by different methods, the better answer will be obtained. From the point of view of the econometric method, the point is
to study an exact estimation method.`)4) In this respect,

the recent research by Johnto this problem. John
Method", presented at

Geweke "Exact Inference
1986 Australian Meetings

August 28, 1986.

Geweke gives an answer
in Dynamic Econometric
the Econometric Society,IMroRT DEMAND ST'RUCTURAL CHANGE 7

IN THE PACIFIC BASIN COUNTRIESAppendix Data Source and Definition of Variables
All the data used in the paper are quarterly and seasonally unadjusted
from the first quarter of 1960 to the fourth quarter of 1980.
The definition of variables is as follows:

Mt = volume of import at the 1980 prices,
PMt == ratio of the price of import to the domestic price ofimporting country. The GNP deflater is used as thedomestic price,
Yt =: gross national product at 1980 prices.
The data for Mt, PMt and Yt were drawn from IMF, Intemational
Financial Statistics. 1983.

oo

Table 1.

Bayesian Estimates of the lmport

Equations. (1970 : 1-1980 : 4)

Change

Price

in Y

Elasticity

1.040(1.53)- O.523(1.106)

No Change

No Changegz-1O.667(8.00)- 1.903(1.23)*

1.805(1.39)

ChangeNo Change

}.

2.301
(O.19)**

11.970(2.27)**- 1.184(O.19)**- 1.057(O.89)**

ChangeChange2.117(1.49)- O.860(O.76)- 9.032(3.se)**- 2.242(1.53)

1.826(O.89)**No Change

ChangeO.438(O.29)*

O.103(O.10)- O.151(1.40)- 1.353- O.121(O.16)

ChangeNo Change

Y

Change(o.eo)**•

2.148

4.811
(8.95)

O.637(O.75)

2.314(O.35)**- O.O02(2.22)**

1.101(O.18)**

73: 4

8.889
(3.23)**

79: 2

2.674
(O.83)**

PM

t1*

t2*

const.

us

74 : 2

76: 2-15.118(6.59)"- 1.426(1.53)*

CA

74 : 1

77:3- 8.176(1.80)**

JA

73: 1

75: 2

AL

72 : 1

KR

71:2

l.hapnfie

m const.

Notes : ti' =74:2, for example, means that the posterior mean of t

(O.49)'**

r is thesecond quarter of 1974.

and (')

means that the variable is

The values in parentheses are posterior standard deviations.

(**) means that the variable is significant at the 5% levelsignificant at the 10% level.

The source : Table 2 of Katayama, Ohtani and Toyoda (1985).

IncomeElasticity

i
3

E

g
ig

k

Table 2.

tl*

us

62 :

t2*
2

65 :

Bayesian Estimates of the ImportPM

const.
1

Equations.

Change(1960 : 1

ChangeYln const.

in PM-1969 : 4)

Changein Y

Price
Elasticity- O.971(8.ss)- O.089(1.63)

O.594(1.29)- 9.620(9.47)

1.597(2.03)

1.195(1.43)No Change

IncomeElastieity

No Change

CA

62 :

4

65 :

2

1.300
(4.59)

O.389(1.48)

O.414(O.94)- 7.351(5.oo)

O.719(2.19)

1.490(1.15)No Change

No Change

JA

63:

1

65 :

1

16.728- 6.359(2.sc)**- 1.315(1.64)-28.1sa(20.57)*6.367(3.77)*

2.619(1.92)

ChangeNo Change

AL

62 :

- 18.932

5.152(4.33)(2.50)**

5.922

16.808(9.36)*- 4.974(4.47)

4.490(2.53)**No Change

Change- 2.170(O.42)**(O.12)**

O.750

1.131
(1.32)

O.610(O.62)

O.140(O.17)No ChangeKR(17.63)

67 :

2

1

Notes

63: 2
68 :

1

(9.26)**- 2.911(O.84)**: Korea 1os5: 1 -1069: 4
See Footnotes in Table 1.

No Change

z

78
-:
mv
i':
a ca

i•s

2E
ll
$

o

and t2* which

US values Of t,1*

Table 3.

maximize L-az(ti", t2', P).
for varlous
values of-1980: 4)(1970 : 1

p

-O.1

o.o

O.1

O.2

O.3

O.4

O.5

O.6

O.7

O.8

O.9

tl*

10

10

10

10

10

10

10

10

10

11

11

t2*

23

23

23

23

23

23

23

23

23

23

23

Lmax

251.07255.77260.07263.78266.71

268.70269.65269.55268.51

266.96265.37

p.

-o

ca
fi

N
:.l

Notes : tl*= 10 is corresponding

to the second quarter oft2*= 23 the third quarterof 1975.

The values of Lmas do not1972,

t = 11 the third

quarterof 1972

andk}

include the constant.

g
Table 4.
conditional onp=tl* ==

O.5

US estimates ofparameters oonditiOnal

Pi

P2

P3

O.OOI
(2.05)

O.435(1.27)(19.96)

O.OOI(2.10)

O.493(2.11)

61

t2* andp. (1970 : 1

62

03

R2

on tl*.

--

1980 : 4)

E

DW

2

s

4.567

2.216

- 1.000(-2.72)-17.40(-7.32)

O.762

1.os

(7.os)

4.585

2.374

- 1.210(-4.83)-18.os(-11.08)

O.905

1.03

10, t2* == 23

p= 10, t2* = 23o.oa(2.93)(12.12)tl* ==

Notes : The values in parentheses areisa Durbin-Watson ratio.

t-values,

R2 is a confficient ofdetermination,

and DWgTable 5.

tl*

t2*

us

72:2

75:3

CA

74:3

78:1

JA

74:1

PM

const.

4.567

O.435

ML Estimates of thelmport Equations.

ChangeY

ChangeO.OOI-17.40(-7.32)**- 1.0oo(2.05)**(-2.72)**

2.216(7.48)**(25.98)**2.267-12.14(-3.29)**-2.265(-3.97)**:.hapnfiePrice

O.5 O.762

1.ce

ChangeChange

2
7 g•

2.058
(3.22)**-O.6 O.979

1.78

ChangeChangeO.775

O.O O.os7

1.76

ChangeChangeggg(19.ee)**(1.27)*-

2.267(25.os)**(3.44)**

75:2 -19.05(-11.ag)**(6.05)**(14.25)**8.797(4.37)**(-6.17)*.

(4.67)**

O.880
O.733

-O.823 -IncomeDW

in Y

m const.

(1970 : 1 -1980 : 4)p

R2

Elasticity

Elasticity

AL

72:3

74:1

12.68
(2.47)*

1.196(O.99)-1.756(-1.52)-12.16(-2.17)**-1.323(-1.08)2.593(2.07)**

O.5 O.638

1.54

No Change

Change

KR

70:3

79:4

3.472
(3.63)**

O.61Z(1.82)**-o.ooz(-O.21)-1.337(-O.88)-1.555(-2.88)S*O.271

O.O O.962

1.86

ChangeNo Change(1.58)*tatu(* *) means that the variable is significant at the

See notes on table 4.

z

i

2
3

Notes : The values in parentheses are conditional t-values.
significant at the 10% level for the one-sided test.

tE

5% level and (*) means that the variable is

g
to

2

:

12 SEllCHI KATAYAMA AND KENICHI ISHIGAKI
References[1] Bacon, D. W. and Watts D. G. (i971), "Estimating the Transition between Two Intersecting Straight Lines," Biornerica 58,
pp. 525-534.

[2]Brown, R. L., Durbin, J. and J. M. Evans, (1975),"Techniques
for Testing the Constancy of Regression Relationships Overtime," Journal of Rayal Statistical Society, ser. B 37 (1975)
149 - 192 .

[3]Goldstain, M. and M. S. Khan, (1985) "Income and Price Effects in Foreign Trade," Chapter 20, in Handboole of Intemational Econornics vol. 2, ed. by R. W. Jones and P. B. Kenen,
pp. 1041'1105, (North Holland).

[4]Heien, D. M. (1968), "Structural Stability and the Estimationof International Import Price Elasticities," Kylelos 21, pp. 695711.

[5]Houthakker H. S. and S. Magee, (1969), "Incerne and Price
Elasticities in World Trade," Review of Econornics and Statistics, 51 pp. 111-125.

[6]Joy, J. and J. . Stolen, (1975), "The Change in the U.S.
Import Demand Function from the 1950's to the 1960's" Review
of Econornics and Statistics, 57, pp. 109-111.

[7]Katayama, S., K. Ohtani and T. Toyoda, (1985),"On the Structural Change in the Import and Export Equations: An International Comparison," forth coming in The' Economic Studies
Quarterly.

[8]Katayama, S. and K. Ishigaki, (1985)," An Empirical Examination of the Trade Structural Change in the Pacific Basin
Countries," (mineo).

[9]Ohtani, K. (1982), Specification Analysis in Regression Modelin Econornetrics, (in Japanese) [Keiryokeizaigaku ni okeru
Kaikimoderu no Tokuteika Bunseki]. (Institute of Economic
Research, Kobe University of Commerce).

[10] Ohtani, K. and S. Katayama, (1985) "An Alternative GradualSwitching Regression Model and its Application," The Econonzic
Studies Quarterly, 36. pp. 148-153.

[11] Ohtani, K. and S. Katayama, (1986), "A Gradual Switching Regression Model with Autocorrelated Errors," Econornics Letters
21, pp. 169-172.

[12] Quandt, R. E. (1958), "The Estimation of the Parameters of
a Linear Regression System Obeying Two Separate Regimes,"

IMPORT DEMAND S'IRUCTURAL CHANGE 13

IN THE PACIFIC BASIN COUNI'RIES

Journal of Arnericam Statistical Association. 53, pp. 873-880.
[13] Stern, R. M., C. F. Baum and M. N. Green (1979), "Evidence on

Structural Change in the Demand for Aggregate U.S. Imports
and Exports," Jourual of Political Econorny, pp. 179-92.
[14] Tsurumi, H. (1980), "A Bayesian Estimation of Structural Shiftby Gradual Switching Regression with an Application to the
U.S. Gasoline Market," in Bayesian Analysis in Econornetrics
and Statistics in Honor of Harrol Jeffreys, ed. by A. Zellner.
pp. 213-240. (North Holland).

[15] Volker, P. A. (1982), "On the Import Demand Function: A
Comment," Journal of Political Econorny, 90. pp. 1295-1299.

A SYNTHE'IIC ANALYSIS OF STRUCTURALIST AND
MONETARIST THEORY OF LA'HN AMERICAN INFLATION
Shoji NISHIJIMA

I lntroduction
This paper attempts to synthesize the structuralist and the monetarist

theory of Latin American inflation, using the standard macroeconomic
analysis. The synthesis is based on the idea that structuralists mainly
focus on supply factors and monetarists focus on demand factors. Sucha simplification makes it possible to analyze both approaches in a common

framework, that is, the aggregate supply and aggregate demamd analysis.
However, to include agricultural bottlenecks, the aggregate supply is
divided into two parts; agricultural supply and industrial supply. We

assume that the price of agricultural sector is determined by market
clearing, but the price of industrial sector is determined by mark-up
principles.

As the recent experiences of Latin American inflation suggest us,
analysis of causes and initiating root factors are not sufficient to ex-

plain inflations of more than 200 per cent per year. To analyze accelerated and continued inflation, we introduce some mechanisms into themodel such as propagation processes and inertial adjustment. We postulate that the propagation processes are generated by the accommodative
money supply and exchange rate devaluations. The inflation inertia isassumed to be caused by the wage indexation with one period lagged
adjustment. In the model, we treat these institutional factors aspolicy rules.

'Before introducing our model, section ll gives a brief survey ofthe dispute between the monetarists and the structuralists with a critical comment on the two approaches. Our model is presented along withthe solutions and the effects of the policy rules in section M.
Section IV contains concluding remarks.

ll A Brief Survey: Monetarism vs. Structuralism
In this section, we summarize briefly the salient points of the struc-turalist-monetarist dispute. Although the dispute covers inflation
control policies and even the development problems, we are concerned

16 SHOll NISHIJIMA
only in the dispute about causes and initiating factors of inflation'i.)ll-1 The Monetarist Approach
The term "Monetarist" in Latin America originated with the stabilization program of 1956 recomrnended by the International Monetary Fundto ease the Chilean inflation and balance of payments problem. However,
the term "Monetarist" is used broadly in Latin America beyond the
U.S. Monetarist position that stresses "only money matters". In thisrespect, the Latin American monetarists include those who see excess
aggregate demand as the cause of inflation. Campos [1961] argues that
the Latin American monetarists should be called "fiscalists" in thesense that the monetarist approach not only depends on the standard
money supply policies but also on the use of fiscal policies.

According to Watcher [1976], however, the fact that increases inmoney supply generally follow excess aggregate demand may explain theorigin of the use of the term "Monetarist" to refer to the positions
that emphasize excess aggregate demand as the cause of inflation. In

Latin America, excess aggregate demand is typically generated bylarge-scale government deficits financed through increases in money sup-ply. The deficits are blamed on such factors as expansionary fiscal
policies, inefficient public corporations and inappropriate subsidy
policies, while financing through the money supply results from the weak-ness of government bond markets and taxation systems.
The monetarist position will be very clear and simple in the analysis of aggregate supply and aggregate demand, since expansionary fiscal
and monetary policies which monetarists stress as the cause of inflation can be expressed as a shift of the aggregate demand curve to theright. Needless to say, there will be need to modify this simple interpretation depending on the assumptions as to the degree of bond financing to the budget deficit, the exchange rate system, and the international capital movility, etc. However, at least in a simple closed economy, it is reasonable to assume that the monetarist viewpoints could beinterpreted as a shift in the aggregate demand curve upward and to theright, causing a rise in price or rate of inflation in the short run.
While the monetarist position can be understood as a simple one,this simplicity results in it being too general to apply directly to the1) The survey in this section is based on following papers: Baer [1967],
Baer and Kerstenetzky [1974], Barvosa [1983], Campos [1961], Felix [1961],
Grunwald [1961], Lopes [1979], Oliveira [1964], Seers [1962], Sunkel [1958],
Watcher [1976].

ASYNTHEnC ANALYSIS OF SlkUCTURAUST AND 17

MONETARIST THEORY OF LATIN AMERICAN INFLATION
Latin American case. In this context, the structuralism appeared
as a criticism to such a general approach. Structuralism started fromthe criticism of the ECLA's members to the failure of the stabili-

zation programs in Chile supported by the IMF. Although the 1956
implementation of a monetarist restrictive policy reduced the inflation
rate drastically, it brought an abrupt slowdown in Chilean output andemployment. Such an adverse effect on the economic activity forced theabandonment of the stabilization program within a few years. Thus,
confronting with such a problem, the ECLA's economists tried toseek a new policy framework to reduce inflation without costs on thereal side. It can be said that the structuralist theory emerged as thetheoretical background for this policy framework.

ll-2 The Structuralist Approach
The fundamental structuralist position2>argues that the primary causes
of inflation are structural factors such as supply bottlenecks in the
agricultural and external sectors and price rigidities in the industrial
sector. In our aggregate supply and demand analysis, structural supply
bottlenecks can be interpreted as an insufficient (sometimes stagnant)rightward shift of the aggregate supply curve relative to the rapid shiftof the aggregate demand curve due to industrialization. Structural pricerigidities in the industrial sector will make sure the positive relationship between the relative price of agricultural goods and the generalprice level. This leads, as we see in the model, an aggregate supply
curve which reflects the structuralist supply bottlenecks. Now, it isuseful to contrast the structuralist anti-inflation policy with that of
the monetarist to understand the basic difference of the two approaches.
To reduce inflation, the monetarist stresses a left and downward shiftof the aggregate demand curve by restrictive monetary policies. Be
aware that this policy accompanies a reduction of real output. On thecontrary, the structuralist recommends a right and downward shift of
the aggregate supply curve by improving structural factors. It isclear that the structuralist policy atternpts a concomitant reduction in
inflation with an increase in real output.
We now turn to the principal hypotheses of the structuralist position. The first hypothesis refers to the existence of structural bottlenecks in the agricultural and external sectors as the source of changes

2) As to the similarity with the Scandinavian structural model, see
Canavese [1982].

18 SHon NISHIJIMA
in relative price of agricultural goods. The rapid industrialization
and urbanization increase demand for primary materials and foodstuffs
which is not satisfied by the domestic agricultural supply due to structural conditions. The Latin American land tenure system is generally
characterized by latifundia and minifundia. It is said that both typesof properties are still in a traditional and inefficient condition. Be-cause large estates (latifundia) are held for the owners' status andfor political reason, they are not managed by profit maximization
motivations. Their responces to price signals and demand pressures are
weak and, therefore, their supply is inelastic. Few resources are spenton improving the productivity of their land and tenant farmers. On theother hand, small holdings (minifundia) are too small and too traditional to cultivate efficiently and they only produce for their own consumption. Thus, they cannot respond to the demand pressure at all. As

to bottlenecks of external sector, structuralists point out thechronic balance of payment deficits due to the trade structure which
depends on primary goods exports and the failure of import substitution.

The unfavorable condition in the balance of payment means that theauthorities have to reduce imports which are necessary for domestic
agricultural production and also have to reduce food imports which could
satisty the excess demand for food. To sum up, the structuralist posi-tion hypothesizes the existence of supply bottlenecks due to structural conditions and demand expansion due to rapid industrialization.
These work to generate excess demand for agricultural goods, causing

a rise in relative price of agricultural goods. ,The second structuralist hypothesis is based on the assumption ofprice regidities in the industrial sector. Prices of industrial goods
are assumed to have downward rigidities ascribed to noncompetitivemarket structure and price setting through the mark--up principle. Industrial wages are also assumed to be downward rigid because of the existence of institutional wage setting and pressures from labor unions.
Therefore, increasing prices of foodstuff lead to a higher cost of living in urban sector which leads to higher wages. A rise in wages finally leads to an industrial price rise through mark-up pricing. Thus,
it is the rise in the relative price of agricultural goods that results
in an increase in general price level through the rigidity and institutional setting of industrial prices. One additional factor to thishypothesis is the chronic exchange rate devaluations which are ascribed to the structural balance of payments deficits. An increase in
the exchange rate implies a rise in prices of imported materials which
is finally transmitted to industrial prices through mark-up pricing.

ASYNTHEIIC ANALYSIS OF STRUcrURAUST AND 19
MONETARIST rneoRY OF taTDg AMEklCAN INFlanON
The third hypothesis refers to "passive money" which means themoney supply being depehdent on price or inflation. Whenever inflation
rate increases due to structural factors that accompany an abrupt slowdown in the economic activities, the authorities are disposed to increase the rate of growth of money supply to recover the economic activi-

ties to the desired level. One reason is clearly the lack of money
supply control due to insufficient statistcal data and poorly controlled

financial system, while the most fundamental is that the social andpolitical costs of econornic contraction are too high as compared to thecosts of inflation. Thus, the governments have to expand the money
supply to maintain popular support. In addition to these reasons, there
is another sources to explain passive money. Once the inflation rateincreases, a fall in real balance leads a rise in the real interest rate

which provokes expansion of institutional credits which used to befinanced by the money supply.
Now we interpret the passive or endogenous money hypothesis in theanalysis of aggregate supply and demand. The passive money means thata recession and a inflation due to structural reasons leads authorities
to accommodate the money supply to inflation in order to avoid disruptions to the economy. This can be expressed as: facing with a leftward shift of the aggregate supply curve due to structural factors,
the authority tries to shift the aggregate demand curve to the rightthrough the expansional money supply to recover the recession. But,
we have to notice, that such a passive or accommodative money supply
induces an additional inflation. In short, the structuralist argues
that the money supply is not a cause of inflation but is passive to inflation. So, the money supply works to confirm or assure the inflational processes.

ll -3 A Critical Comment on the Two Approaches
So far, we have summarized briefly the monetarist and structuralist
debate. We now turn to the criticisms of the two approach to give somebases for the construction of our model.
Criticisms to the monetarist position is well-known. As alreadymentioned, the monetarist position neglects differences in the economic
structure among countries and differences over time within the same
countries. Since monetarists mainly focus on the demand side, they
offer a demand contraction policy without taking into account supply side

conditions such as agricultural supply bottlenecks and other supply
shocks. A$ a consequence, there is a possibility that a monetary con-

20 SHon NISHIJIMA
traction aimed to reduce inflation which originated from structural
factor, may aggravate unemployment that will not be tolerated by the
public and the government.
As to the structuralist positions, they fail to specify the role ofaggregate demand factors. In the real world, inflation should be regarded as a result of interactions of demand and supply factors. Particu-

larly, since the first oil crisis, many Latin American countries
have created strorTg demand pressures through numerous big national projects to avoid the recession caused by the oil shock. It is natural tothink that the inflation rates, during the period of the late 1970s andthe early 1980s, were strongly affected by demand factors. In thiscontext, a general framework is necessary to analyze interactions ofdemand and supply factors.
Finally, to investigate accelerated and continued inflations inrecent Argentina and Brazil, it will be insufficient to consider
only the causes of inflation that we have descussed above. If structuralist factors and/or monetarist factors alone are to account foran accerelated and ongoing rise in the inflation rate, it will be necessary for the respective aggregate curves to shift continuously andat an rising rate only by these factors. Thus, in this respect, we
introduce a propagation and an inertia of inflation into the model, in
addition to causes of inflation.

III The Model Analysis
M-1 Assumptions of the Model
The general structure of the model developed in this section is described very simply with following assumptions.
(1) The economy has two sectors: agricultural sector and industrial
sector.

(2) The price of agricultural goods is determined by market
clearing.
(3) The price of industrial goods is formed through mark-up pricing on wage and imported material price.
(4) The aggregate demand depends on real money stock alone, andforeign demand is assumed to be negligible.
(5) The nominal wage and exchange rate adjustment and the nominal
money supply are managed by policy rules which are accommodative
to the general price level.

(6) The general price level is a weighted average of prices in

ASYNTHenC ANALYSIS OF STRUerURAUST AND 21

MONEI'ARIST THEORY OF LATIN AMERICAN INFLATION
agricultural goods and industrial goods.

(7) The aggregate price and output are determined at the intersection point of an aggregate demand and an aggregate supply
schedule.
(8) Price expectations are formed rationally.

M-2 TheModel
The complete model contains following equations.

ytas=2+g(Pf -wt)+uf`, g>O ' (1)y,ad+p,a -p, =ay,, pt >o (2)y,as=yfd, (3)p; =eet +( 1-e) wt +ul (4)p, =rpf +(1-T) p;, o<T <1 (s)Pt +ptt=mt+uf, (6)wt =at Pt-i+( 1-a)Et..iPt +i5, OSas1 (7)e, =fl pt +g, os fi $1 (s)mt = rPt + m-, O g r $ 1 ( 9 )where all variables are expressed in logarithm and denote; yfS: real agri-

cultural supply; Z : trend component of real agricultural supply; Pf:
price of agricultural goods; wt :nominal wage rate;yfd: real demand for
agricultural goods; Pt :general price level; yt ; real aggregate demand(or real aggregate output); P} : price of industrial goods; et: nominal

exchange rate;mt: nominal money stock;Et-i Pt: expected general pricelevel for period t formulated at the end of last period t-1:w,e, m:long run desired level of each variables which the authority tries toestablish;ufS, uL u9: stochastic disturbance to the agricultural supply,
industrial goods price and aggregate demand, respectjvely, which areassumed as white noise and not correlated each other.
Equation (1) demonstrates the supply function of agricultural goods
which is composed of a secular component, a cyclical component and arandom term. The secular component reflects a trend of productivity
change and capital accumulation which are expected by structuralists
to be stagnant in case of latifundia and minifundia type land tenuesystem. The cyclical component varies with change of real wage in termsof its own price, while the nominal wage is assumed to be common toboth sectors. Since the nominal wage changes depend on expected generalprice levels as we see below, unpredicted changes of real wage cause
the cyclical movement in the supply of agricultural sector. The random
term reflects stochastic disturbances such as climate conditions, which

22 SHon NISHIJIMA
affect the agricultural supply independently with the unpredicted changeof real wage.
Equation (2) shows the real demand in terms of general price for
agricultural goods which depends on only real aggregate demand. Thismeans that the price elasticity of demand is nearly zero, since we suppose that the agricultural goods imply essential foodstuff which is insensitive to price change.
Equation (3) is the equilibrium condition for agricultural goods

market.
Equation (4) means that industrial goods prioe is formed throughmark-up on wage cost and imported goods cost. For a simplification,
the mark-up ratio and the dollar price of imported goods are normalized
to unity, allowing the industrial goods price to be expressed as aweighted average of nominal wage and exchange rate. Under this formulation, the supply of industrial goods is implied to be fully elastic
to price, and the actual Ievel of industrial supply is determined by
the portion of the aggregate demand which is not distributed to agricultural dernand. A random term is also included in the equation to reflect
stochastic disturbances to the wage rate and exchange rate.
Equation (5) is a definition of the general price level.
From the equation (1) to (5), we get
Pt== [T,etyt +( 1 + gp )( 1 -T ) eet +{( 1 + gp)( 1 -T)( 1 -e) +Tgp } wt

-T2 vTufS] /(1-T+q). (10)This equation may be called a structuralist aggregate supply function. The positive relation between Pt and Nt is derived from that a risein agricultural goods price increases its supply (then an increase in yt)

by a decline in real wage rate in terms of its price, while a rise inrelative price of agricultural goods brings a general price increase.
Other variables that represent structural factors work to shift the
supply schedule. The less a change of Z and the more a change of wt
and et, the more the supply schedule shifts to the left. Thus, we seethat structural factors mentioned in the preceeding section could be
expressed on the supply schedule in a simple way.
In equation (6), the aggregate demand is specified as a functionof real money belance alone. Foreign demand is assumed to have no infuluences on the aggregate demandP)A random variable is also included
3) The case in which foreign demand is included in aggregate demand wasanalyzed in Nishijima [19at] in a similar model. The main conclusion does notchange as to price behavior.

A SYNTHEIIC ANALYSIS OF STRUcrURALIST AND 23

MONEI'ARIST THEORY OF LATIN AMERICAN INFLATION
in the equation representing stochastic disturbances in money supply
that are not controlled by the monetary. authority.
The model is reduced to two schedules, equation aO) and (6), and theintersection of the two gives a short run equilibrium price and output.
The equilibrium solution forPt is,
Pt == [T/tmt +( 1 + g) )( 1 -T)eet +{( 1 +g))( 1 - T )( 1 -e )+Tg)} wt-rR-TufS+Tltuf]/(1-T+go +Ttt) (11)
As we expected, the demand factors that represent the monetarist viewpoints also have positive relations with Pt .

So far, we constructed a very simple aggregate supply and demandmodel which reasonably reflects structuralist and monetarist factors.
It is clear, however, that this simple model only explains the causes
of inflation or the initiation of inflation. To analyze the recent
evidence of high and continued inflations in Latin American countries, we have to introduce the mechanisms of propagation and inertia ofinflation. Now, we turn to the policy rules.

Basic idea for wage adjustments follows the standard formulationof wage indexation developed by Fischer [1983],
wt = ctPt+( 1 -a)Et-i pt + iiJ(12)This forrnulation postulates one period wage contact which is based on
expected price for period t formed at the end of period t-1. However
indexation rule corrects this predetermined wage rate according to therealized price level. ct measures the degree of indexation. Since thereal wage is equal to w in case of ct =1, full indexation rule cankeep the real wage at a certain level. We suppose that the authority
considers the real wage w to be desirable and can change its level inthe long run depending on the economic conditions. Here it is also
assumed that the wage adjustments by labor market conditions dose notexist.

In our model, we specify a lagged indexation according to Simonsen[1983]. Nominal wages are adjusted at fixed time intervals based on
the price of prior period. We assume here the one period lagged indexation as the equation (7). Lagged indexations introduce the inertial
adjustment processes for the long run equilibrium into the model. The
higher the parameter ct , the more the adjustment process becomes backward-looking, and thus inertial.
Equation (8) shows an adjustment rule for exchange rates. i denotes
the desired real exchange rate and its level could be changed in the long

24 SHOll NISHIJIMA
run by authorities (the maxidesvalorisagdo in Brazil may be the case).
P measures the degree of which exchange rate are adjusted according
to general price levels. The case of fl ==1 assures the actual real

rate to be w.
Money supply rule is given by equation (9). m denotes the desired
real money balance which the authority tries to establish, but its levelcan be changed in the long run reflecting, for example, changes of financial institutions, budget deficits and the level of foreign reserves.
r measures the extent to which nominal money supply is accommodating

to the general price level. Full accommodation (r=1) implies thereal money stock are held at the level of m. This accommodative rule
for money supply will play an essential role to introduce the inflation
propagation into the model. We interprete "the passive money" pointed
out by structuralists as highly accommodative money supply rule. As
to the empirical studies for the accommodative money supply in Latin
American countries, many studies such as Cardoso [1977] and Contador[1978] examined the structuralist view.

M-3 Solutions of the Model
The model is reduced into the aggregate supply and the aggregate demand.
We now begin with the, supply function. Substituting the wage and theexchange rate rule into the equation (10), we get( 1 -a23)Pt -aiyt = a3 ctPt-i +a3( 1 -ct )Et-i Pt +a2?+a3iZJ -a42 -a4ufS+ asu;

where, ai=Tpt(1-T+q)a2=(1+g)(1-T)e/(1-r+g)a3 =[(1+g)(1-T)(1-e)+Tq] / (1-T+g)
a4 =T/(1-r +g)

as =(1+g)(1'T )/(1 -T +q) (13)This supply function can be interpreted as a variation of the Lucas
type supply function. If we derive a special case of this function
assuming that e =O and a wage indexation without time lag, the Lucas
type supply function will appear:
yt =yn +[( 1 - ct) /ai ](Pt - EtdPt )+ut

where, yn=(a4/ai)R-(1/ai)diut == (a4/ai) ufS -(as /ai ) ecl(13')
It is clear that the difference between the two equations comes fromthe existence of the exchange rate and the stickness in wage adjustment.
By equation (6) and (9), the aggregate demand function with the

A SYNTHETIC ANALYSIS OF STRUCTURAUST AND 25

MONEI'AIUST THEORY OF LArllN AMERICAN INFLATION
money supply rule will be given as:( 1 - r)p, +yt = m- + ug (14)Notice that the aggregate demand curve will be vertical when the money

supply accommodation is complete (r =1).
Under the assumption of rational expectation, the short-run equilibrium will be obtained as follows. From equation (13) and (14), we
derive the pseudo reduced form of Pt,
Pt =[a3 ctPt -i + a3 ( 1 -a ) Et -i Pt +a2 e- +a3ib +ai -m -a4 A -a4utaS+ asu;

+aiuf]/[1-a2B+ai(1-r)](15)

Getting the conditional means of equation (15), given the total infor--mations available of period t-1, we obtain the rationally expected
price of period t:
EPt = [a3 ctPt-i +a2Z;+a3 th+ai in -a4a]/[ 1 -a2P+ai( 1-r) -a3 ( 1 -+ ct)]

Then, the actual price of period t is given by substituting EPt into the

reduced form equation:
Pt = [a3 ctPt-i + a2Z;+a3ib+ai -m -a4R] / [ 1 -a2 iB +ai( 1 - r) -a3( 1-ct )]+[-a4ufS+ asul+ai af]/[1'a2fl+ai(1-r)] a6)
Applying the same process, the aggregate real output is obtained:
yt =[a3ctyt-i - ( 1- r)a2?-( 1-r) a3 th+( 1-a2P -a3) m+( 1-r)a4R -a3 ct uf--i ]/[ 1-a2 fl +a, ( 1-r) -a,( 1-ct)] (17)+[( 1-a2 fi)uf +( 1-r) a4ufS-( 1-r) asul ]/[ 1-a2B+ai ( 1-r)]

M-4 Effects of Policy Rules(1) Effects on the short-run equilibrium price.
The effects of changes in policy parameters on the short-run equilibrium price are derived by partial differential of each parameters on
the coefficients of variables. The results are listed in Table 1.

Table 1
Pt-i
;r

+++

b-

wr

m++

-++

M-A-ufsul

oo

-++++

++++

uf
o++

note: To get the effects of adverse supply shock, 2 and ufS, are treatedwith negative sign.

26 SHon NISHIJIMA
From equation (7), a rise in the wage indexation parameter (ct) increases the weight for Pt-i and decreases the weight for Et-iPt. Since
the politically desired variable (?, di, m- ) and the trend variable ofagricultural supply (Z) are the components of Etrl Pt, a decrease in
its weight implies that a rise in ct will reduce the effects of thesevariables on price. With regards to random variables, the wage indexation parameter has no effects, because ct is only linked with Pt-i andEt-i Pt which are independent on stochastic disturbances of the period t.

Thus, as Iong as the wage.indexation rule is formulated like equation(7), wage indexations will reduce the inflational impacts of the long-run
politically designed variables (th, ?, m-) and the effects of the agricul-

tural supply bottleneck (Z). In addition to this, the wage indexation rule has no relations with unpredicted disturbances and, in otherwords, the wage rule dose not amplify the impacts of stochastic distur-bances of inflation. On the contrary, the exchange rate rule (P) andthe• money supply rule (r) have positive effects on the coefficientsof all the variables. This is because the nominal exchange rate andthe nominal money supply are adjusted according to the present priceand transmit the inflational impacts to industrial price through themark-up principle. Therefore, we have to notice that the policy rules
have different effects on inflation in the short-run.
<2) Effects on inertia
Taylor [1979] developed a macro model of the sticky wage adjustmentof overlapping wage contracts. Here we introduced an another form of
sticky wage adjustment where an inertia of price adjustment appears
because of the one period lagged wage indexation. If the characteristicroot of the homogeneous part of equation (16) is smaller than unity inabsolute term, a steady solution exists. The characteristic root isglven as:'p =- a3ct/[ 1-a2fl +ai ( 1-r) -a3 ( 1-ct)]

As long as O< ct, P, r<1, O<p<1 is satisfied. Since the charcteristic root p implies a convergence speed from some deviated point to
the long-run equilibrium, p indicates the extent of the inertia in priceadjustments. Because a higher value of p means a slower covergence
speed, a higher p means more inertial adjustment process. That is, theinfluence of past prices on current price becomes more persistent. The
question now arises whether the policy rules make the adjustment process
more inertial or not. We get, therefore, the partial differencials of
the three rules on p:

A SYNIHETIC ANALYSIS OF STRUCIURAIJST AND 27

MONETARIST THEORY OF LATIN AMERICAN I]NFLATION

Op/Oa>O, Op/OB>O, Op/Or>O
AII the rules have positive effects on p. Thus, when the current priceis deviated to higher level than that of the long-run equilibrium due
to some disturbances; the higher value of policy rules results in thehigher prices level being more persistent.
(3) The long-run equilibrium priceAs far as lpi<1, there exists a long-run equilibrium. Getting
the unconditional means of equation (16), we derive the long-run equilibrium of pricei

5= [a2g+ a3 di+ai 'm -a42]/[1rm a2 fi +ai(1-r) -a3] (ls)As is expected, the long-run price is determined by4?, ab, -m, and a.
However, the extent to which these variables influence the long-run
price is dependent on the value of the policy parameters P and 2,
but not dependent on that of ct. Because the wage indexation rule
is weighted term for Pt-i and Et-i bt which will have same value in thelong run, the weights of ct will be cancelled out. Thus, a does not haveany effect on the long-run wage rate and does not appear in equation (18) .

It can be said, therefore, as long as we assume the wage adjustment
rule formulated by Fischer, its effect on the long-run price is neutral.

On the other hand, the exchange rate rule and the monetary rule
play a role for the inflation propagation. If these rules are more
accommodative (have higher values), the coefficients of equation (18)become larger and the effect on the long-run price will be amplified.
More accommodative rules imply steeper aggregate supply and demand
curves. If the authority sets fi and r at the value very near to 1,
P will have an almost unlimited value becaUse the denominator of equation (16) will be very near zero.
Thus, if we recognize that the exchange rate and the monetary pol-icies in some Latin American countries tend to be highly accommodative, our results will be very suggestive to explain the high andcontinued inflation in Latin America. Now consider the fol}owing
probabilities in these countries. Confronting with social instabilities

caused by the hyper-inflation itself and/or the restrictive IMF
policy, the authorities may raise the planned real wage (w-) which they
consider desirable in the long-run. Also, the authorities may have toraise its planned real exchange rate (e) in order to recover externalbalances which are indispensable for the external debt strategy. Furthermore, it is worth mentioning the possibility that the reductionsof subsidies for agriculture sector would have a negative impact on

28 SHon NISHIJIMA
the secular trend of its production (R). Finally it is important thatthe huge budget deficits have emerged from numerous gigantic national
projects and inefficient goverment enterprises. These have been a primary causeofthe increase of real money supply (?iD which the monetary
authorities have to accept. Under such circumstances, widely establishedpolicy rules which are highly accommodative to current price tend to
propagate the inflational impacts to a higher inflation, and tend to
perpetuate inflation by the inertial adjustment process.
(4) Effect on the asymptotic variances
To know the effects of policy rules on the impacts of stochastic
disturbances, we get the asymptotic variances of random terms. Expressing the deviations from the long-run equilibrium as?ft = xt -E(x),We obtain the following equation from equation (16) :pN, = pSt -i +[-a4u'Vat S+ as ill +ai ilf ]/ [ 1-a2P+ai ( 1-r)]

As the characteristic root of the hornogeneous part of this equation issmaller than unity as long as O<ct, B, r<1, a steady state solution exists and S has stochastic movements aroundE(St)== O with a certain variance. The asymptotic variance of PNt following AR (1) is:E(pN2)= [bg /(1-p2)] o.2, +[bf / ( 1-p2 )] o?• +[b; /( 1-p2)] o9
where, bo -- a4/[ 1 - a2 fl +ai ( 1-r )]bi = as/[ 1 - a2 fi +ai (1-r )]b2 = ai /[ 1 - a2 fi +ai ( 1-r )]o2as,oi and o3 represent the variance of ufS, ul and uf respectively.

Since the partial differencials of the three rules on the coefficientsof variances are all positive, the more accommodative policy rules work

to increase the variances of stochastic disturbances. Notice that,while the wage indexation rule has no impact on stochastic disturbancesin the short-run equilibrium, the wage rule in this case has a positive
effe.ct op the variances of stochastic disturbances through the effecton mertla.
It is obvious from the definition of p that, when all the policy
rules are fully accommodated at the same time (ct, fi,r = 1), a steadysolution does not exist and P-"t follow a "random walk" as:

PNt=PN-1+Ut
where, ut =:[ -a4 ataS +asV; +aiW] / [ 1-a2 ]A SYNTHETIC ANALYSIS OF STRUcrURALIST AND 29

MONEI'ARIST THEORY OF LAT[N AMERICAN INFLATIONIn such a case, price movements wi}1 become very irregular depending
exclusively on stochastic disturbances.

(5) Effects on the real aggregate output
Finally we mention the relation between the aggregate output andthe policy rules. While the policy rules tend to propagate inflations
and have effects of inertia on inflation, they tend to isolate the impacts of shocks in w- , ?,-m and Z and disturbances on the real aggre-

gate output. From equation (17), the full accommodation in money
supply rule (r == 1) works to isolate completely the shocks and disturbances on supply side (g, -iZI, R, ufS, u;'), because r == 1 makes theaggregate demand curve vertical. On the contrary, the rules in supply
side have an incomplete isolation effect. The exchange rate rule P
can isolate the shock of m- which comes from demand side, but isolates
incompletely the stochastic disturbances of utd and uf-i. Similarly,, ufandutd-i.
the wage rule dose not have a complete isolation effect on mSuch a difference between the rules is easily understood from the factthat the aggregate supply curve becomes vertical only in the special
case as already discussed in equation (13').
From the implications of the results in this section, we may havethe following interpretations for the Latin American inflation. If
the authorities face with the social instabilities caused by recessions
and unemployments, they tend to adapt highly accommodative policies

to stabilize output and employment. The reason is that in Latin
America, the social and political costs of recessions and unemployments are generally considered to be more serious than the inflation
costs. In this sense, the highly accommodative policy may be reasonable from the viewpoint of the Latin American reality.

IV Concluding Remarks
This paper is an atempt to synthesize the monetarist and the structuralist theory of Latin American inflation, based on the simplifi-cation that the former emphasizes on the demand side factors and thelatter dose on the supply side. Furthermore, we introduced the accommodative policy rules to explain the propagation process. The lagged
wage indexation rule played important role in generating the inertial
adjustments.
Instead of summarize the results, we now briefly mention the futuretasks implied by the study.
(1) In our model, the adjustment process throngh the disequilibrium in30SHon NISHIJIMA

labor market is neglected. To investigate the adjustment process fromthe short-run equilibrium to the long-run equilibrium, this adjustment
is indispensable.

(2) In addition to wage indexation, other indexations to financial
assets and taxes should be considered.

(3) From the recent Brazilian evidence, the endogenous indexation,
which means the reduction of the indexation interval is of interest to
explain the acceleration of inflation (see Simonsen [1983]).

References[1]Baer, W., "The Inflation Controversy in Latin America: A
Survey", Latin American Research Revietv, Feb., 1967.

[2]Baer, W. and I. Kerstenetzky, lnflation and Grotvth in Latin
America, R. D. Irwin, 1974•[3]Barvosa, F. H., A Inflaga'"o Brasileira no Pos-Guerra: Monetarismo versus Estruturalismo, IPEA, 1983.

[4] Campos, R. O., "Two Views on Inflation in Latin America", inA. O. Hirschman (1961).
[5]Canavese, A. J., "The Structuralist Explanation in the Theoryof Inflation", VVorld Development, Vol. 10, No.7, 1982.
[6 ] Cardoso, E., "Moeda, renda e inflag'a'o: algumas evidencias da eco-nomia brasileira", Pesquisa e Planojamento Econ6rnico, Vol. 7,
No. 2, 1977.
[7] Contador, C., "A exogeniedade da oferta de moeda no Brasil",
Pesquisa e PlaneJ'antento Econ6rnico, Vol. 8, No.2, 1978.

[8]Felix, D., "An Alternativa View of the Monetarist-Structuralist
Controversy", in Hirschman (1961).
[9] Fischer S., "Indexing and Inflation", Journal of Monetary Economics, Vol. 12, No.4, 1983.
[10]Grunwald, J., "The `Structuralist' School on Price Stabilization'and Economic Development: The Chilean
Case", in Hirschman (1961).
[11] Hirschman, A. O. (ed.), Latin Arnerican Issues, Twentith Century Fund, N. Y., 1961.
[12] Lopes, F. L., "Teoria e politica da inflag5o brasileira: uma
revisao crftica da literatura", in J. Sayad (ed.), Resenhas deEconornia Brasileira, Saraiva, 1979.

[13]Nishijima, S., "Indexing Policies and Macroeconomic Stabilityin Brazil: Rational Expectation Model, Kobe Economic & Business Review, 30th annual report, 1984.

A SYNTHErlrlC ANALYSIS OF S'IRUCrURALIST AND 31

MONETARIST THEORY OF LATIN AMERICAN INFLATION[14] Oliveira, J. H. G., "On Structural Inflation and Latin Ameri-can Structuralism", Oxford Economic Papers, VoL16, No.3,
1964.

[15] Oliveira, J. H. G., "On Passive Money", Joumal of Political
Economy, Vol. 78, No. 4, Part ll, 1970.

[16] Seers, D., "A Theory of Inflation and Growth in Underdeveloped Economies Based on the Experience of Latin America", Oxford Economic Papers, Vol. 14, No. 2, 1962.
[17] Simonsen, M. E., "Indexation: Current Theory and the Brazilian
Experience", in Dornbusch and Simonsen (eds.), Inflation, Debt,
and Indexation, MIT Press, 1983.
[18] Sunkel, O., "La inflaci6n chilena: un enfoque heterodoxo", El
Trimestre Econornico, Vol. 25, No.4, 1958.

[19] Taylor, J. B., "Staggered Wage Setting in a Macro Model,"American Econornic Review, Papers and Proc. 69, 1979.

[20]Watchter, S. M., Latin Arnerican InfZation, Lexington Books,
1976.

STAGFLAIION

4AUSES AND POLICIES-Nobuo OklsHIo

I Stagflation and Modern Capitalism
The word of stagflation, which is composed of stagnation and inflation,means the situation where economic stagnation and inflation proceed
simultaniously. Following five factors have been accused as the causesof stagflation.

(1) Monopolistic capital: Stagflation is cau$ed by monopolistic
capital's behaviour to administrate prices and accumulation.

(2) State: Stagflation is closely related with the state's fiscal
and monetary policies which are carried out for monbpolistic
capital.

(3) Working class: Stagflation is due to working class's increasing militancy to resist the reduction of the real wage rate below
their required level.

(4) International monetary system: Stagflation is owing to oversupply of U.S.A. dollars and the floating exchange system
which appeared after the collapse of IMF international monetary system. This system had been one of the fundamental institions of post war capitalism.

(5) Energy resources: Stagflation is the result of remarkable increase in the oil price which is the result of the collapse ofimperialistic hegemony over energy resource countries.
In my opinion, all of these five factors deeply relate to the fundamental characteristics of modern capitalism and are closely related
to the occurrence of stagflation.
(1) Stagflation would not have occurred, if monopolistic capital had

not administrated prices to get a higher level of profit and had
not decided capital accumulation anarchically.
(2) Stagflation would not have occurred, if the government expenditure and the monetary supply had not been so great, though depression might have been more serious.
(3) Stagflation would not have occurred, if working class had been
so weak that they could not resist a reduction of the real wage
rate and so week as to passively accept cutting money wage rates
in the case of unemployment.

34 NOBUO OKISHIO(4) If there were not over supply of dollars by the U.S.A. andthe floating of exchange rate and instead the rate of increaseof money supply in capitalistic countries had been restricted,
inflation would not have spread all over the world.
(5) Stagflation would have been mitigated, if imperialistic countries
could depress the real price of oil by dominating oil producing
countrles.
The above five factors can be restated as the following three conflicts or struggles in modern capitalism. (a) conflict between monopolistic capital and working class. (b) conflict between monopolistic
capital and energy resource producing countries. (c) conflict and dependency among imperialistic countries(a) If monopolistic capitalists want to realize a high desired rateof profit, they must force the working class to accept a low real wage
rate or to increase labour productivity. In short, they must raise therate of exploitation. So if the working class is strong enough to refuse this and succeed in raising the money wage rate and resist an increase of labour productivity in order to force down the rate of exploitation, monopolistic capital can not realize their own desired rate ofprofit. Then, monopolistic capital will try to raise the prices of its
commodities to cut down the real wage rate again. In this way, a "wageprice spiral" occurs. This is an expression of a conflict between monopolistic capital and working class.
(b) If monopolistic capital wants to realize their own high desired
rate of profit, they must depress the real price of energy resources
measured by their commodities as low as possible. However energy resource countries which become free from imperialistic ascendancy refuse
the decrease of real price of resources and demand higher prices. If
the real price of the resources rises, the rate of profit of monopolistic capital decreases. In order to restore the rate of profit up to
the desired level, monopolistic capital raises their prices, then thereal price of resources decreases again. The spiral thus caused isan expression of conflict and struggle between monopolistic capital andresources exportmg countrles.
(c) Given technologies, the real wage rate and the real price of resources, the higher the prices of commodities purchased from the othercapitalists becomes, the lower the rate of profit of monopolistic capital becomes. In other word, if production technologies, real wage rate
and real price of resources are given, the profit rates of monopolistic
capitalists have antagonistic relationships. Therefore if monopolistic

SITAGFLAI"ON 35

4AUSES AND POUCIES--

capital in a country raises its price in order to realize its high desired rate of profit, it would cut down the rate of profit of monopolistic capital in the other countries unless the sacrifices are shifted

to working class and resources supply countries. These capitalists
upon which a decrease in the rate of profit is forced raise the priceas a counter-attack. The spiral thus caused is an expression of conflict among monopolistic capitalists.

As sketched above, stagflation must be analized by the main factors
characterizing modern capitalism and by the main antagonistic relationships in modern capitalism.

ll Causes of Economic Stagnation
As stagflation has two faces: stagnation and inflation, we first consider the causes of stagnation. Here, stagnation means the situation
where the rate of profit and the rate of utlization of' equipment lingers
at a low level and the rate of unernployment is rather high. In orderto know the causes of such a stagnation, we must know the factors which
determine the level of the rate of profit, utilization and unemployment.
There shall be dealt with in turn.

(A) Factors determining a Rate of Profit
It is needless to say, the realized value of the commodities produced in a country depends on the amount of demand for them. To illus-

trate, let C+V+M be the value of the commodities which is realized in a country as a whole. Here C represents constant capital, Vvariable capital and M surplus value. Then

C+ V+ M-D (1),where D is the quantity demanded for commodities of the country. The
demand for commodities of the country D cosists of following six parts.
Ch: Replacement demand for domestic capital goods. That is, demand
to replace capital goods worn out by the production of domestic goodsin this period. Ah: Consumption demand of the working class for domestic goods. Bh: Consumption demand of capitalists for domestic
goods. Ih: Accumulation demand (new investment demand) of capitalists for domestic goods. Gh: Demand of the government for domestic
goods. E: Demand from abroad for domestic goods, i.e. exports. Therefore we get36 NOBUO OK[SHIO
D= Ch +Ah+Bh +Ih+ G, +E (2).
Let Cf, Af, Bf, If and Gf denote replacement demand, consumption
demand of working class, consumption demand of capitalist, accumulation demand of capitalist, demand of the government for import goods
from abroad, respectively. Then the aggregate amount of imports F be-

comes.FT= Cf+Af+Bf+If+ Gf (3).
As replacement demand is equal to constant capital part of realized
goods,

C- Ch+ Cf (4).

As consumption demand of working class is assumed to be equal to variable capital part of realized goods net of tax on working class T, ,i)

V= Ah +Af+Tv (5).
As consumption demand of capitalists is a part of a surplus value netof tax on capitalists TM,

ct (M- T.) == Bh +Bf O< ct <1 (6),where ct denotes the ratio of capitalists' private consumption demand

to disposable surplus value. Let L G, T be the aggregate amountof accumulation demand, government's demand and tax respectively, thenwe obtain

I=
Ih+If
(7)
G= G,+ Gf , (8)T= Tv+TM (9).
1) If labourers save a portion of their wages, the equation (5) is written
as

Ah+Af=B (V- Tv) (5').

Here B denotes a ratio of labourers' consumption to their wage after tax andO<ct<fi<1
Replacing (5) with (5'), from the equation (11) which determines a profit rate
after tax r we obtain

V-Tv(1-ct)r==g+d+e-(1'fi)
K(11').
From this we know that, even if g, d and e are the same, the realized rate ofprofit becomes lower than that in the case that labourers expend the total
amount of their wages for consumption.

SrAGFLArll(rv 37

4AUSES AND POLICIESSubstituting (2) N (9) into (1), we get(1-ct) (M- T.) -l+ (G- T) + (E-F) (10).
Djvide both side of (10) by the aggregate capital invested K, thenwe have(1' ct) r= g+ d+e (11),where

r== (M'TM) /K

g= I/K
d- (G-T) /K
e= (E-F) /K(12)

In words, r: rate of profit after tax of this country as a whole, g:
accumulation rate of capitale) d: ratio of government financial deficit
to the invested capital and e: ratio of trade surplus to the invested
capital.

By equation (11), we know the factors determining the realized rateof profit. The rate of profit (to be exact it is a profit rate aftertax, but we shall simply call it profit rate hereinafter) depends onnext four factors. (1) The rate of capital accumulation (2) The rateof financial deficit (3) The rate of trade balance (4) The rate of
consumption of capitalists. If these four factors are given, then the2) Most Marxian economists call 1- ct the rate of capital accumulation, where ct denotes the ratio of capitalists' private consumption to surplus
value. In this paper by the. rate of capital accumulation we mean the rate ofcapitalists' accumulation demand to the total amount of capital, which is equal
to the growth rate of capital.

In my opinion, it is not appropriate to call a ratio of a portion of surplus value not consumed the rate of capital accumulation. For this definition
is apt to imply that capitalists necessarily invest all surplus value which

remains after their consumption. Though it is certain that they privateiyaccumulate this part of surplus value in some form, it does not necessarily
meet the accumulation demand for commodities. Some part may be accumulated as

money or financial assets. It is "Say's law" to claim that it always meetsthe accumulation demand. Furthermore this definition is apt to imply that
capitalists can accelerate their accumulation demand only by reducing a ratioof their consumption to surplus value ct. But they can do it without reducing
this ratio. For example, capitalists can expand their accumulation demand byborrowing. Increases of production and exploitation rate in response to theaccumulation demand enable capitalists to accelerate accumulation even if theratio of their consumption to surplus value remains unchanged.

38 NOBUO OKISHIO
realized rate of profit is determined.3) The greater are the rate of cap

ital accumulation, financial deficit, trade balance and capitalists'
consumption, the greater the realized rate of profit becomes. The maincause of high rate of profit in the upward phase of the trade cycle isthat capitalists increase accumulation demand I which arises the rateof capital accumulation l/K Conversely, the main reason why the3) Mr. Turuta (Chu-o University, Japan) offered the following twoquestions on the equation (11). (a) Is equation (11) satified only in theequilibrium? (b) What relationship is there between the realized profit rate
thus determined and the exploitation rate? As these questions seem to be interesting for readers, we try to answer these as compactly as possible.

(a) The equation (11) is derived from equation (1). Equation (1) showsthe equality of production and dernand for the total commodities produced in
the country; so, it is the equilibrium condition. Therefore, equation (11)derived from the equation (1) is also satified just in the equilibrium state.
When aggregate production is greater than demand, we have(1-a) r> g+d+e (' ).

But even in this case realized profit rate, ra is determined by(1 - ct) ra = g+ d+e
We easily know that realized profit rate ra is lower than the profit rate in
the equation (*), because some portion of product is not realized. Conversely
when aggregate production is less than demand, we have

(1- ct) r< g+ d+e ('* ).
In this case, by price appreciation and production expansion, the realized profit rate rises, reaching the level determined by the equation (,11).

(b) Given the rate of capital accumulareion g, financial deficit d and tradebalance e and capitalist's consumption rate ct , we have

( 1 h ct ) r= g+ d+e

Thus, realized profit rate after tax is determined. The profit rate after
tax is by definition

M-Tm

r= K

which we can rewrite asr= (1 -tDMN
N 'K
ptN= (1-tm) 1+
pt ' K
where tm, N and M denote tax rate on surplus value, the amount of living lab-

our which is equal to V+M and the rate of exploitation respectively. Therefore, given realized profit rate after tax, r, tax rate on surplus values, t.,

and the organic cornposition of capital N/K, the rate of exploitation pt isdetermined. For example, a rise of capital accumulation rate, g, increases therealized profit rate after tax, r, and increases the exploitation rate, ",when the tax rate, t., and organic composition of capital, N/K, remain unchanged.

STrAGFIAIT(CRil 39

4AUSES AND POUCIES--

rate of profit falls in downward phase of trade cycle is that accumulation demand of capitalists decreases and the rate of capital accumulation falls. To explain, if the rate of accumulation falls for certain
reasons, the rate of profit decreases. Responding to this, capitalists

restrain their accumulation demand, causing a further decline of thecapital accumulation rate. Thus, the downward cumulative spiral of
the profit rate occurs. In order to mitigate this cumulative process,the increases of the government financial deficit or of the tradebalance become necessary to offset the decline of the capital accumulatlon rate.

'(B) Factors Determining the Utilization Rateand Unemployment Rate
In capitalism, the means of production are possessed by the capitalist class and decisions on production with them are possessed bycapitalisLs. Capitalists make these decisions aiming at a higher rateof profit. In modern capitalism, monopolistic capitalists govern mostof main means of production and make decision on them. They have acertain desired rate of profit. Unless this profit rate is achieved
usually, the capitalists do not keep the utilization rate. Instead,they try to raise the monopolistic price by lowering the utilization
rate to restore the rate of profit. Therefore, the utilization rateis considered to depend on the realized profit rate (see Fig. 1).

As seen in the above section, the rate of profit is determined by
the rate of capital accumulation, financial deficit and trade balance.
So the rate of utilization also depends on these factors. A declineof a rate of capital accumulation results in a decrease of rate of profit and a further decline in utilization. This, consequently, increases
the unemployment rate. In the same way, a decline of the rate of thegovernment financial deficit or trade balance result in the decrease of
the rate of profit and utilization. Consequently, the rate of unemployment lncreases.
Here we must note that there is another important determinant of
the rate of utilization and unemployment. The Fig. 1 shows the functional relationship between the rate of utilization and profit. What
determines such functional relationship between the rate of profit andthe utilization as shown in the Fig. 1?

NOBUO OKISHIO

40
rate of utilization

maxlmum rateof utilization

normal rateof utilization
1

1
I

1
1
1
'
l
1

'
'

1
'
'
1

1

rate of profit

required rateof profit

Fig. 1
The relationship is not a technical and natural conditions, but represents the attitude of monopolistic capitalists who make the production decision. For example, when the degree of monopoly rises and thedesired rate of profit rises, the curve in the Fig. 1 shifts downward.
So the rate of utilization corresponding to a certain rate of profit
declines. Conversely if the democratic regulation succeeds in depressing the desired rate of profit of monopolistic capital, the curve shifts
upwards and the utilization rate corresponding to a certain rate ofprofit rises. In this case, in spite of a decline of rate of profit, it
is possible to raise the utilization rate. Thus, we can see that thefactors determining the profit rate and monopolistic capital's attitude
in decision making are the factors determining the rate of utilization

and unemployment.
(C) Causes of Stagnation

To study the causes of stagnation we need to investigate what

STAGFLA"C",l 41

4AUSES AND POHCIE$

actually happened to the following four factors determining the rate ofprofit, utilization and unemployment after 1970: the rate of capital
accumulation; the governmental financial deficit; the trade balance;
and the decision making attitude of monopolistic capital. These aretaken up in turn.
(1) The rate of capital accumulation: Capitalist's desire for capital accumulation depends on their expectation with respect to profit
rate, utilization rate and financial conditions. But there are factors
which restricts the capital accumulation. If production technologies
are given, the rate of capital accumulation cannot exceed the growthrate of labour supplies and resources supplies in the long run. In
order for capital to grow faster than the supply of labour and resources,

new technologies must be introduced which enable them to save labourand resources. However after 70's, the rate of technical progress became low and limitation of resources supply became apparent because ofresources supply countries' independent supply policies. In addition,in the 70's most people began to recognize that the natural environmenthas been destroyed in the process of capital accumulation by monopolistic capital and further destruction of the environment will endager
the survival of human beings. Thus, strong warning and opposition occurred against monopolistic capital accumulation. As these limitations
became noticable, the rate of capital accumulation declined in the 70's.
(2) The rate of financial deficit of the government: A fall of acapital accumulation rate results in a decrease in the profit rate, andin utilization, and an increase in the unemployment rate. To stop or
mitigate these, monopolistic capital asked the government to raise therate of financial deficit. The government increased financial expenditure more than tax revenue. However, this induced several troubles.
If the deficit is financed by an additional issue of national bonds
which are sold in open market, the price of national bonds falls. A
rise of the rate of return on government bonds induces a rise of thegeneral interest rate. This is the so-called "crowding out effect", andnegatively influences the demand for capital accumulation. Thus, theincrease of financial deficit rate may be offset by a decrease in therate of capital accumulation and the rate of profit and utilization.
The unemployment rate, of course increases. To avoid such a negative
effect, the central bank must buy government bonds by increasing themoney supply. Such an increase in the money supply causes inflation.
Inflation may cause political crises and an unfavorable trade balanceowing to the higher price of exported goods compared with prices in42 NOBUO OKISHIO
other countries. This makes the government unable to continue to increase financial deficit rate by expanding the money supply.
(3) The trade balance: When the rate of capital accumulation falls
and it becomes impossible to raise the governmental financial deficit
enough to offset the fall for the above reasons, the rate of profit andutilization declines and unemployrnent rate rises. To cope with it,

there remains nothing but to raise a rate of trade balance. Everycountries pursued favorable balance of trade through driving exports.
However, this also caused troubles. The sum of trade balance of all
coutries in the world is always zero. Therefore, if some country has
a favorable balance of trade, there must be another country which has
a trade deficit. As in a country which has a trade deficit, the realized rate of profit falls in response to the deficit. The increaseof the trade surplus raises the rate of profit of the country sacrificing the other country's profit rate; so severe international conflicts
take place. To confine these conflicts within a tolerable range, someconstraints to export become necessary. Though the aggregate sum of
trade balance of all countries being zero as already mentioned, still
it is possible for the sum of so-called advanced capitalist countries
to be positive on the conditions that developing countries and socialist countries are compelled to have trade deficits. So, advanced capitalist countries can raise their own rate of profit in this way. However, a deficit in the trade balance in developing countries causes
their enormous cumulative debts. The increasing possibility of thedeveloping countries defaulting on their deficits makes exports to thesecountries extremely unstable. The exports to socialist countries willremain unstable, unless the politically, militarily and economicallyantagonistic relationships between capitalist countries and socialist
countries are terminated.
(4) Monopolistic capitalist's attitude in decision making: Even
if by the reasons stated above, the rate of profit falls, the rate ofutilization would not decrease and the unemployment rate would not increase, if capitalists had kept the rate of utilization high under alow rate of profit. However, in the 70's the monopolistic capitalists
tried to restore the rate of profit by raising monopoly prices throughrestricting production. So the rate of utilization declined sharply
and the unemployment rate increases greatly in response to a decreaseof profit rate.

SIIAGF[ATION 43

4AUSES AND POUCIESM Mechanism of Stagflation

The stagnation is caused by monopolistic capitalists' restrictive decision-making on production and the decline of the sum of the rate ofcapital accumulation, financial deficit and trade balance. Why is inflation accelerated under the condition of stagnation? In order toanswer this question, we first must study the antagonistic relationshipamong the rate of profit, real wage rate and real price of natural resources.

(A) The Antagonistic Relationship among the Rate ofProfit, Real Wage Rate and Real Price of Natural
Resources
When production technologies are constant, the rate of profit, thereal wage rate and the real price of resources have the antagonistic relationship one another. Here, the real wage rate and real price of re-sources are measured in terms of the produced commodity.
When the production technologies are unchanged, a rise of the profit rate is sure to lower either the real wage rate of labour or thereal price of resources. Likewise, a rise in the real price of resources necessarily decreases either the profit rate or the real wage
rate of labour. Finally a rise of real wage rate of labour will certainly cut down either the profit rate or the real price of resources.
Thus, there exists the antagonistic relationship among profit rate, thereal wage rate and the real price of resources under constant production
technologies.

(B) The Incompatibility among Requirements of Monopolistic
Capital, Working Class and Resources-Supply Countries.
As stated above, the profit rate, the real wage rate and the real
price of resources have an antagonistic relationship. 0n the other hand,monopolistic capital, the working class and resources-supply countries

require a certain level of the profit rate, real wage rate and real
price of resources, respecsively.

(1) The required rate of profit. Monopoly capitalists, as mentioned
before, are not indifferent to the level of profit rate when they makedecisions on utilization of their own production equipment. They nevernormally utilize their equipment without expecting their required rate

44 NOBUO OKISHIO
of profit depends on the degree of monopoly, on the capital accumulation rate intended by monopolistic capital and on the rate of interest,etc.

(2) The required real wage rate. As working class make a living
only by selling their own Iabour power, it is natural that they areseriously interested in the kinds and quantities of consumption goods
purchasable with their wage. The real wage rate is directly related to
the rate of exploitation of labour under constant technologies. Suppose

labourers work by the amount N and earn their wages V in terms ofvalues (i.e. bestowed labour), surplus value M is given by

M- N-V (13).

As V is the value of consumption goods purchasable with wages,

where B denotes the amount of consumption goods received by labourers,
and t denotes the value per unit of consumption goods. Then the rateof exploitation M/V is expressed, using (13), (14), as

M N-Btv== Bt (15).

By the definition of real wage rate R,

R.. B

(16),

N

then substituting (16) into (15), we have

M 1-Rtv= Rt (17).

When production technologies remain constant, the amount of bestowed
Iabours necessary to produce consumption goods t also remain constant.

Then from (17), the higher (lower) is real wage rate R, the lower(higher) rate of exploitation becomes. Therefore the requirement ofworking class for a Ievel of real wage rate implies that they refuse
higher rate of exploitation than a certain level.

(3) The required real price of resources. Since World War ll
until the middle of 1960's, as energy resources-supply countries havebeen ruled by the imperialistic countries which are represented by
U. S. A., real price of raw oil has been depressed. But the supply
countries succeeded in getting out of the ascendancy of imperialistic

SIrAGFLArllCpt 45

4AUSES AND POLICIES----

countries, and became able to have their own oil-supply policy. Thus,
they became able to require a certain real price in order to use oilproceeds for their independent development.
(4) The incompatibility of requirements. When monopolistic capital,
working class and resources-supply countries have the required profit
rate, real wage rate and real price of resources respectively, can all
three requirements be satisfied at the same time? If these required
levels are high, the three requirements become incompatible because, as
described above, there exists the antagonistic relationship among the
profit rate, real wage rate and real price of resources under constanttechnologies. As a result, when monopolistic capital gains its required
rate of profit, either required levels of working class or resourcessupply countries, or both of them, cannot be achieved. When resourcessupply countries realize their required real prices of resources, either
the requirements of monopolistic capital, or the working class cannot
be realized. In this sense, the three requirements are incompatible.

(C) The Rate of Profit Required
by Monopolistic Capital and Stagflation
To reiterate, there exists the antagonistic relationship among therate of profit, the real wage rate and the real price of resources.
Then it is difficult for the profit rate required by monopolistic capital, real wage rate by labourers and price of resources by supply
countries to be compatible, if the required levels of these three arehigh. For both of the required real wage rate of labourers and thedesired real price of resources to be realized, the rate of profit must
be ct in Fig. 2. Whereas monopolistic capital's required profit rate
is much greater than ct, as shown fl in Fig. 2. The inequality fl>ashows the incompatibility of requirements of monopolistic capital, of

labourers and of resources supply countries. Thus, we have threedomains of profit rate, as (a), (b), (c) in Fig. 2.

'

o

fl

ct

Fig. 2rate of profit

46 NOBUO OKISHIO
When the rate of profit is in the domain (a), it is remarkably low,much lower than the desired level P. Therefore, the level of utilization, employment and demand for natural resources are also very low.
However, as the rate of profit is below ct, both the real wage rate
and reai price of resources exceed their requirements.4) The economy isin the stagnation, but it is not probable that inflation is accelerated
in this case because of the following. First, because there exists
high rate of unemployment in the labour market and great excess supply
in the resources-market, labourers and resources supply countries hesitate to raise the money wage and prices of resources. Second, large
scale idle capacity in the commodity market prevents monopolistic capital from raising their prices.

When the rate of prvfit is in the domain (b), it is lower than thedesired level B, similarly to the case (a). Therefore, there exists
under-employment of equipment and labours. So we have the stagnation,4) Profit rate and real wage rate have the antagonistic relationship as
shown in Fig. A, when production technologies and the rate of utilization are

given. Even if production technologies embodied in the existing production
equipment are given, labour productivity differs according to the level of utilization of this equipment. It may be natural to suppose that labour productivity

increases up' to the maximum as the rate of utilization increases. After theutilization rate exceeds the normal level, labour productivity begins to decrease sharply. As monopoly capitalists decide the utilization rate in responseto the profit rate, we may have the relationship between the profit rate andthe real wage rate as shown in Fig. B. This results from labour productivity
changing in response to utilization rate. It is notable that when the profit
rate (and at the same time the utilization rate) is very low, the real wage rate
becomes a increasing function of the profit rate. Therefore, in this situation,
we cannot observe the antagonistic relationships between them.

real wage rate
real wage rate

profitrate

Fig. A

profit rate

Fig. BSTIAGFLAIION 47

4AUSES AND POUCIES--

though its severeness is weaker than the domain (a). But in the domain(b) the rate of profit exceeds ct. So real wage rate and price of resources do not meet requirements. In this domain, all three requirements are not satisfied. It is possible here that inflation is accelerating in spite of the stagnation of production and employment. Working class and resources-supply countries try to raise the nominal wage
rate and resources price, respectively, to attain their requirements
while monopolistic capitalists raise prices to hold their profit rate.

In this domain, the excess supply of labour and resources and idle
capacity are not severe enough to negate the militance of labourers andresources supply countries and the greed of monopolistic capital. Thena "Price-wage-resources price spiral" occurs if monetary counditions
are accomodating. Accordingly, stagnation and inflation can co-exist
when the profit rate is in the domain (b).
When the rate of profit is in the domain (c), it is at an outstandingly high level and exceeds the desired level fl. Therefore, production equipment and labourers are highly employed. In this case, as the
profit rate exceeds ct, real wage rate and real price of resources ismuch below their required levels. Labourers and resources-supply
countries raise the nominal wage rate and the price of resources while
capitalists raise their prices to maintain high rate of profit. This
inflation is not accompanied with the stagnation, therefore, is not stagflation.

As known from above, the following four conditions are necessary
for stagflation to occur.

(1) The profit rate required by monopolistic capital, the real wage
required by working class and the real price of resources requiredby supply-countries are incompatible.
(2) Monopoly capitalists have the ability to administrate their own
price so as to maintain or restore the rate of profit when therate of utilization. of their equipment is not extremely low.
(3) Labourers and resources-supply countries do not passively accept

the reduction in the real wage rate and the real price of resources below their requirements and they can raise nominal wage
rates or the price of resources even if there exists excess supply
in the labour and resources market.
(4) The realized rate of profit, which is determined by the sum of
the rate of capital accumulation, financial deficit and trade balance, is lower than that desired by monopolists, and is higher
than the level which is compatible with desired real wage and real

48 NOBUO OKISHIO
price of resources (in Fig. 2, between ct and fl).

IV The lntervention of the State and Stagflation
Next problem is to consider the reason why a realized rate of profit
is confined into the domain (b), where stagflation occurs, for a longtime. For this purpose it is necessary to make clear that the accumulation process is unstable in the capitalistic economy. Further, the modern capitalism is very vulnerable to this instability.

(A) The Instability of Accumulation Process in the
Capitalism

When the high rate of capital accumulation increases the realized
rate of profit and the utilization rate, especially when the utilization
rate exceeds its at the normal level, capitalists accelerate the demands
for their accumulation and increase the rate of accumulation. This raises
a realized rate of profit and utilization rate further, inducing capi-

talists to increase the rate of capital accumulation further. Thus,
occurs the upward cumulative disequilibrium process.
Conversely, when the low capital accumulation rate decreases therealized rate of profit and the utilization rate, especially when it
falls below its normal level, capitalists curtail the rate of accumulation. This decreases the realized rate of profit and utilization further. In response, capitalists decrease the rate of capital accumulation further. This is the downward cumulative disequilibrium process.
Thus, once the disequilibrium occurs, it is not smoothly adjusted
by the price mechanism but cumulates in the capitalistic economy. Thisphenomenon is due to the fundamental contradiction in capitalism. It
arises, in particular, from the fact that the private capitalists, especially monopolistic capiLalists, make their private capital accumulations decision without consideration of the effects on the society as
a whole.
If the cumulative disequilibrium process goes on ceaselessly; itbecomes impossible for capitalism to reproduce itself. In order forcapitalism to reproduce itself, the cumulative process must be switchedto the opposite direction. The switching of the upward cumulative process of disequilibrium into the downward cumulative process is carriedout by "Crisis". Crisis is "Forced Equilibrating Process" as K.
Marx said. Conversely the downward cumulative process is switched

STAGFLArllC"g 49ÅëAUSES AND POLICIES-

through the recovery of the rate of capital accumulation. Thus, capitalism inevitably takes the form of a trade cycle.
(B) The Intervention of State in Trade Cycle
By the instability of the accumulation process in the capitalistic
economy, when the rate of profit is larger than fl, namely in the domain(c), there must be upward cumulative process of disequilibrium. Because
responding to high rate of profit, the rate of utilization exceeds its
normal level and it accelerates the rate of capital accumulation, whicharises the rate of profit further. Conversely, when the rate of profit
is smaller than fl , namely in the domain (a) and (b), there must be down-

ward cumulative process. In response to the low rate of profit, there
appears idle equipment. This discourages capital accumulation, which
decreases the rate of profit further.
As seen above, it is the situation where the rate of profit lies
between a and fl,i.e. in the domain (b) that stagflation occurs. However, when the rate of profit is below fl, that is, left of fi in Fig.
2, it continues to decline owing to the instability. Even if the rateof profit is in the domain (b) initially, in due time, the rate of profit falls into the domain (a) where it is below ct. In this case, we

can observe the stagflation only in the earlier stage of downward
phase of the trade cycle.
Now we must consider why the rate of profit stays in the domain (b)and the stagflation lasts for a long time. It is due to the intervention of state in the trade cycle. When the profit rate is initially in thedomain (b), the downward cumulative movement comes out. The unemployment of equipment and labour cumulatively increase and the working
class and the minor capitalists face the great difficulties if the movement is left as it is. Today, however, people are no longer passive
and accept these difficulties as their inevitable "fate" and wait the"fortune" calmly. They try to struggle against the governing class's
inablility to control the production capacity. A political crisis iscaused and the state cannot help but intervene in order to avoid thesepolitical crises and to check depression for the sake of the monopolistic capitalists who want to restore their rate of profit. The government takes various measures to prevent profit rate from falling further(These measures may include a increase in government expenditure
financed with deficit, a reduction of interest rate, introducing favorable tax system for investment and others to stimulate capital accumula-

50 NOBUO OKISHIO
tion, or the promotion of export.). These policies prevent the profit

rate from falling into domain (a) in Fig. 2. 'On the other hand, the state must also intervene to keep down therate of profit into the domain (b) from the domain (c). For, as mentioned above, in the domain (c) the profit rate shows the upward cumula-

tive movement and accelerates capital accumulation. At that time, theprofit rate much exceeds a, depressing the real wage rate and the real
price of resources below both required levels. Further, the real wage
rate and resource price continue to decline. Against the reduction of
the real wage rate and the real price of resources, the working classand resources-supply countries, assisted by the excess demand of labourand resources, easily raise the nominal wage rate and the resources
price. Capital pushes up the commodity price not only to offset thesenominal rises but to raise their rate of profit taking advantage ofexcess demand of commodities caused by the increased rate of capital
accumulation. Such process is repeated, so inflation is rapidly accelerated.

The accelerated inflation, on the one hand, is a process of theincreasing rate of the profit and the decreasing real wage rate and real

price of resources. So, it is certainly advantagous for monopolistic
capital. On the other, it produces the crisis which may endanger thecapitalistic system when it is allowed to go on. The inflation accelerated depreciates real income of the people who earn a fixed income
and involves all people into the struggle for greater share of nominal
income. This appears as an "economic civil war". Moreover, when inflation is accelerated at different speeds among the nations, it diminishes the exports of the country with the most rapid inflation andbrings about an excess of imports over exports. That is, the balanceof payment deteriorates. Furthermore, the accelerative hyper-inflation
deprives money of the function to measure values and results in difficulties in the economic calculation. This provokes a serious politicaland economic crisis. Facing these menances the state intervenes inorder to cope with the crisis. The government exercises the aggregate
demand contraction policy. Financial expenditure is postponed or contracted and the damands for accumulation are restrained. Through thesepolicies the rate of profit is brought back from the domain (c) into (b)where stagflation occurs.

Thus, the generation and persistence of stagflation are closely
related with the intervention of the state which is one of characteristics of modern capitalism.

SrAGFLA"ON 51

4AUSES AND POUCIE$
V Two Policies

The policies against stagflation are opposite according to the interestof which class they are based on.

(A) The Policy on the Standpoint of Monopolistic Capital
The policies against stagflation on the side of the monopoly aim
at getting rid of both stagnation and inflation, keeping the profit rate
high and depressing money wages and the money price of resoures. These
policies try to suppress the working class and the resources-supply
countries from raising the nominal wage rate and the price of resourcesin response to the reduction of their real incomes.

For these purposes it becomes necessary to intervene in labour
organizations, in order to make them less militant and to force them toaccept the reduction of the real wage rate by various kinds of maneuveres. Then, if this fails to persuade the working class to acquiesce,

compulsory measures are introduced. To weaken militancy of working
class, the policy to increase the rate of unemployment intentionallyby decreasing effective demand greatly are sometimes introduced.
Similarly, against resources-supply countries, the political policies including even military power is mobilized to force them to accept
a decline of real price of the resources and to revive the favorable

conditions of resources-supply for the monopoly. The main economic
policy is to decrease demand for the resources by diminishing aggregate

demand.
However, it is impossible to keep permanently labourers and re-sources-supply countries from raising the nominal wage rate and resources price when their requirements remain unsatisfied.
In order for monopolistic capital to keep the profit rate highwithout depressing the real wage rate and real prices of resources which
provoke severe struggles, they must introduce new techniques which increase productivity of labour and decrease the resources input per aunit of product. Given the requirements of monopolistic capital, working class and resources-supply countries, the incompatible relationshipamong three is lightened by technical innovation. In other words, thesetechnical innovations make the domain (b) narrower. Thus the possibility of stagflation becomes less.

Howgver, for such technical innovations to be introduced, there
must be drastic changes on the system of labour including reshuffling,NOBUO OKISHIO

52

degradations and discharge of labourers. In some cases, industries asa whole are scrapped. In such industries, not only labourers but also
capitalists are obliged to resist. To remove these resistances, thegovernment also tries to conservatize the labourers' organizations andto force them compulsorily.
Even if labour productivity increases and energy input per unit
decreases sufficiently, still it is highly probable that there remains
a wide stagflation domain, (b) in Fig. 2. The real wage rate requiredby labourers does not always remain as before when labour productivity increases. It means the acceptance of higher rate of exploitation when labour keeps the required real wage rate as before in spiteof an increase of labour productivity. Labourers aim not only at theabsolute level of the real wage rate but a relative one to labour productivity. That is to say, they require a reduction of the exploitation rate.5) The required real wage rate may rise relative to the labour

productivity. Then when labour raise the money wage rate to realize
their requirements, the monopolistic capital raise prices to counterattack and keep the high rate of profit. Then price-wage spiral reappears. Even sufficiently high technical innovations cannot exclude
this. As to the price of resources, the same reasoning is valid.

(B) The Policy on the Standpoint of Working Class
The policies on the side of working class have diametrically opposite purposes. They try to get rid of both stagnation and inflation,
keeping the high wage and real price of resources by depressing the realized profit rate of monopoly. They also try to compel capitalists tokeep a high rate of utilization and employment, depressing a rise ofcommodity prices which restore the realized rate of profit.
For the majority of the society, it is not desirable to keep therate of capital accumulation exceedingly high for a long period. It
depresses people's consumption and causes inflation, resources shortage5) The rate of exploitation, pt, is, as is already seen in third section,
expressed by... iR-,Rt .. Ifit -1,
where R denotes real wage rate, and t denotes an amount of bestowed labour
necessary to produce one unit of consumption goods. Therefore 1/t shows labour
productivity. Thus, we know that exploitation rate depends on a relative ratioof real wage rate R to labour productivity 1/t.

SrAGFLATIQN 53

4AUSES AND POLICIES-

and pollution of the environment. Furthermore, the upward cumulative
process of disequilibrium caused by the exceedingly high rate of accumulation is inevitably followed by the downward cumulative process where
people's welfare is seriously injured. Therefore, policies for the
majority must aim at reducing the excessively high rate of capital accumulation, financial deficit and trade surplus.

To curtail excessive capital accumulation, the tax system favorable

to investment must be removed and the monetary and the financial
system which promotes investment must also be reformed. To decrease
the financial deficit, the tax system favorable to monopolistic capitalmust be removed and government expenditures for monopolistic capitaland for military purposes must be decreased. To reduce trade surplus,
people's consumption must,) be increased, for which the increase of real
wage and the shortening of working day are necessary.
If these three rates are reduced by the policies, the rate of profit will surely decline. However, it is naive to suppose that monopolistic capitalists will accept this without any counteraction. If thedecision on current production remains intact and in their hands, they

try to lower the rate of utilization and to decrease employment oflabour, corresponding to the low level of profit rate. They also will
try to increase prices to restore their required profit rate. The othercounteraction is to shift the adverse effect of the policies to nonrnonopolistic capital. The decrease of the three rates reduces the rateof profit, which is the weighted average of profit rates.6) So, it ispossible for monopolistic capital to keep their profit rate intact bysacrificing non-monopolistic capital even though the weighted averageof profit rates falls. The final counteraction is to move their capi6) Let ni be the amount of profit after tax and Ki be the amount of invested capital in the i th sector. The rate of profit after tax in the society
as a whole is given by- nl+z2+ -------- +zn

r- Ki+K2+ "----"--- +Kn 'Rewriting it, we have

- riK i+ r2 K2 + ---------- + r, Kn

r-

Ki+K2+ --"'----- +Kn 'where

ri= ni /Ki
Here ri denotes profit rate in the i th sector. Thus we know tihat r 'is a average of ri with weights Ki.

54

NOBUO OKISHIO

tal abroad.
The policies cannot achieve their aims unless they succeed in check-ing these counteractions. Against monopolistic capital's strike, notonly the inducing or compulsory regulation by the government but also
the civil regulation by labourers employed by monopolistic capital andothers are needed. Against their shifting the adverse effects to othercapital, the policies must not only reduce the aggregate sum of thethree rates but also pay attention to the directions of changes in demand. Against their escaping abroad, the systematic regulations of international transactions are indispensable.

In short the democratic policies on stagflation is the intervention
for the interest of people in monopolistic capital's decision on capital
accumulation, production, employment and pricing. To exercise thesepolicies effectively, the establishment of the government which is sup-ported by people and has the intention and ability to do it is absolutely necessary. Monopoly capital will desperately take every political and economic measures to hinder this. As stated above, even after
the democratic government is established, they will try to counteract
against these regulations. Stagflation stands on the class struggle
both in its causes and in policies against it.

A COMPUTABLE GENERAL EQUIUBRIUM MODEL
OF THE JAPANESE ECONOMY*
IVlitsuo EzAKI **Summary
The purpose of this paper is to present a computable general equi-

librium (CGE) model of the Japanese economy which integrates
real and financial sectors, and to apply it to a quantitative evaluation of the oil price changes and the fiscal and monetary policies
from the point of view of the short run comparative statics.

The model attempts to explicitly introduce financial aspects
into a multi-sector general equilibrium model and to capture interac-tions between real and monetary phenomena in a rig6rous way under
the general equilibrium setting. The absolute'price level is determined endogenously in the model, and the fields of application of
the model are extended from the industry-related problems to themacroscopic ones such as inflation, stabilizatiori policies and so on.

The model covers markets for products, labor, foreign exchanges
and financial assets. Correspondingly, the model determines productprices, wage, exchange rate and interest rates in such a way as toclear those markets basically. The model consists of 13 industries
and 5 institutional sectors. The data and methodological frameworkof 1980 Input-Oatput Tables and National Aecounts Statistics
in Japan are fully utilized in the construction and applicationof the model.

The performance of the modei is checked for the benchmark year
(1980) only. For the same year, the model is applied to the analysis of comparative statics, giving a quantitative evaluation on theimpacts of oil price changes, the fiscal and monetary policies, andthe direct policy measures to reduce trade surpluses. Sensitivity
test is also made to check the stability of comparative statics.
Dynamic simulations and comparative dynamics based on the model areleft to be done in future.

*A preliminary draft of this paper was presented at a seminar of ResearchInstitute for Economics and Business Administration, Kobe University(May 19, 1985) and also at the annual meeting for Western Japan of the Japan Association of Economics and Econometrics (June 22, 1985), The paper
benefited from helpful discussions with and comments by Professors A. Amano,

S. Ichimura, H. Katano, C. Moriguchi, M. Saito, Y. Shinkai, A. Takayama and H. Tsujii, to whom the author is very grateful. Discussions withProfessor Takayama were especially useful in introducing the financial sector
into the model. The author owes much also to Mr. M. Shibayama for his computational assistance and advices. This research was financially supported bySpecial Project Research on Energy under Grant-in-Aid of Scientific
Research of the Japanese Ministry of Education, Science and Culture.

**Associate Professor, the Center for Southeast Asian Studies, Kyoto
University. A member of the Research Group for International Economics,
RIEBA, Kobe University, 1986.

rmSUO EZAKI

56

1. Introduction
The purpose of this paper is to construct a computable general equilibrium (CGE) model of the Japanese economy which integrates realand financial sectors, and to apply it to a quantitative evaluation of
the oil price changes and the fiscal and monetary policies from the pointof view of the short run comparative statics.

In his previous paper (Ezaki [1985]), the author has presented
a CGE model of the Japanese economy focusing mainly on the real industrial sectors. The model covers markets for products, Iabor and foreign exchanges but not for financial assets (under an implicit assumption that financial markets are all cleared a priori in some way or others). As a result, only quantities, real values and relative prices are
determined in the model, leaving absolute levels of values and prices

undertermined. The model in this paper, on the other hand, attempts
to explicitly introduce financial aspects into the multi-sector generalequilibrium model and to capture interactions between real and monetaryphenomena in a more rigorous way. The absolute price level is now determined endogenously in the model and the field of application of themodel can be extended from the industry-related problems to the macroscopic ones such as inflation, stabilization policies and so on.i)

CGE models are now widely used, mainly by World Bank, for the
analysis of development planning and policies in the developing countries.

The CGE model of Japan in this paper owes its theoretical framework at the starting point to one of the World Bank studies: Dervis,
De Melo and Robinson [1982, Ch. 7]?) The Japanese model here, however, includes a different approach to the labor market, an elaborationin the distribution and expenditure sides of GDP, and an extension
1) See Dervis, De Melo and Robinson [1982, pp. 150-152] for the importance of model's extension in this direction. Major changes in framework of
the present model from the previous one are: (1) addition of behavioral equations, identities and equilibrium conditions for the financial sector, (2) separation of banking and insurance from the industrial sectors, (3) separation of financial institutions from the institutional sectors, (4) revision in the specificationof net property income, and {5) revision in the exchange rate determination.

2) See Sanderson and Williamson [1984] for a survey and evaluation of

the World Bank studies on CGE models. See Drud, Grais and Vujovic[1982], Amranand and Grais [19en], ESCAP [1983] and A. Gelb [1983] formodels of Southeast Asia, which is the region of the author's main interest.
General equilibrium models are widely used also in the developed countries by
the name of applied general equilibrium (AGE) model for the anaiysis of taxation and trade policies. See Shoven and Whalley [1984] for a detailed surveyof such AGE models (which includes CGE models also but partly).

A COMPUTABIE GENERAL E( !UILll3RIUM MODEL 57
OF THE JAPANESE ECONOMY
in the determination of exchange rate and price level, the last of which
is closely related to the endogenous treatment of the financial sector.

It should be emphasized that the Japanese model here fully utilizes
the data and methodological framework of the new SNA (System of National Accounts), which is a synthesis of the five major accounts or
statistics for the national economy: input-output tables, national income
accounts, balance of payment accounts, flow of funds tables and nationalbalance sheets.3)

There exist at least three econoneetric models of the multi-sector
general equilibrium type for the Japanese economy: Saito [1973], Tsu-

jimura and Kuroda [1973], and Saito [1983]. The first two are thepioneering studies in thjs field made in the early seventies, while thethird is an attempt to extend the 1973-version by allowing for monetarybehaviors and the financial sector. They are all carefully made empirical studies. The model in this paper may be said to be a quick versionof these studies in the sense that empirical rigorousness is sacrificed
for theoretical preciseness and operational simplicity (as is the casein most CGE studies)S)

The CGE model of Japan here depends exclusively on Shotva 55
Nen Sangyo Renlean Hyo Q980 Input-Output Tables) (which will bereferred to as I080 hereafter) for the data of industrial productions
and expenditure allocations, so that 1980 is the bench mark year in themodel for which the economy is assumed to be in equilibrium. Almost
all of the other data required in the model such as distributed income,expenditures, physical and financial assets, etc. are derived from Ko-

humin Keizai Keisan Nenpo (Annual Report on National Accounts)(which will be referred to as NAS hereafter). As shown in Table 1,
the model disaggregates the economy into thirteen industrial sectors according to the 72Å~72 table of I080 with a special treatment for energy-3) See United Nations [19os] for the new SNA, and Economic Planning
Agency [1978] for its Japanese version. Social Accounting Matrix (SAM)
is usualsy used for the models of developing countries. SAM may be considered
as a matrix unification of inpuVoutput tables, national income accounts and bal-ance of payments accounts. See Pyatt and Round [1977, 1979] for SAM andits relations with SNA.

4) In the three econometric models, the aggregate budget constraint whichleads to the Walras' Law is not explicitly shown, so that it is not clear
which of the (possible) equilibrium conditions is redundant and therefore dropp-ed from the system. Money is considered as the determinant of absolute pricelevel in the second model above, but its supply is assumed to be identiallyequal to its demand. The wage rate based on the Philipps relations is the determinant of absolute price level in the first and third models above.

58 MITSUO EZAKI
related industries and banking and insurance,5) on the one hand, and fiveinstituional sectors which correspond exactly to the NAS classification, on the other.

The CGE model of Japan assumes Cobb-Douglas production functions for the 13 industries mentioned above. The model employs also
Cobb-Dougals functions in aggregating imports and domestic products into
composite goods for each of the 13 industries. The model assumes furthera Cobb-Douglas utility function (in addition to a constant saving rate)
for the households sector in deriving consumption demand disangregatedfor each industry. In other words, elasticities of substitution are allset equal to one between production factors, between imported and domestically produced goods, and between consumption goods, resulting in thefunctional parameters to be estimated by appropriate shares in 1980.
The model in this paper, therefore, describes the economy of Japan as
the one with unitary elasticity of substitution, assuming it to be in
equilibrium for the bench mark year 1980.6)

The structure and characteristics of the Japanese CGE model
will be discussed in detail in Section 2. The performance of the model
will be checked for the benchmark year in Section 3. In the same section, the model will be applied to the analysis of comparative statics
in 1980, giving a quantitative evaluation on the impacts of oil pricechanges, the fiscal and monetary policies, and the direct policy measures to reduce trade surpluses. Sensitivity test will also be made there
to check the stability of comparative statics. In Section 4, concluding remarks will be given, stressing the necessity of further elaborations of the model especially. toward comparative dynamics.

2. Structure of the Model
Notation and system of equations for the Japanese CGE model are
listed in Table 2 and Table 3, while financial assets and liabilities
accounts used in the model are illustrated in Table 4. Most of the parameters in the model, especially shares, ratios and constant terms, areestimated directly from I080, NAS and other proper sources, but var5) Energy-related industries are separated out in some detail here for themodel to be able to deal with energy problems at a minimum level. The disaggre-

gation in energy-related industries here follows Saito and Ohno [1984] withthe exception of coal industry. The separate treatment of banking and insurance
is necessary-to integrate the financial sector with the real parts of the model.
This industry corresponds exactly to the sector of financial institutions.

6 ) The present model adopts a number of other simplifying assumptions andprocedures, which are listed at the end of Section 2.

A COMPUTABLE GENERAE. E(i}UIM3RIUM MODEL 59
OF THE JAPANESE ECONOMY

ious elasticities in relation to demand and supply functions are derived
from a very crude guess work as the first approach. The latter are summarized in Table 5.
The model is formulated precisely as a general equilibrium system,so that its essential part may best be summarized by the Law of Wal-ras. Combining budget constraints and related equations in Table 3,
we can express the aggregate identity which leads to the Walras' Law
in the following way (See Table 2 for notation):'),X., PDi (X ?- Xi) + VV [E (L si +L.-) -LS]+ ER [ÅíPVVMiMi + (RL.+RA.+RT.) -XPVVMEi-F.]+ (AC.+AC,-AC.*) + (AS.+AS.-AS,* -AS.*)+ (AL.-AL.* -AL," -AL,') == O,
where the second term must be dropped when the minimum wage constraint
holds (i.e., W==W which will be explained in more detail later). As
may be seen from this aggregate identity, it is supposed in the modelthat the domestic prices (PDi, i\3) are determined by the equilibrium conditions in the product markets (eq. (44) in Table 3 and thefirst term above), the nominal wage (VV) by the equilibrium condition
for the labor market (eq. (9) and the second term) unless the minimum
wage constraint is effective, the exchange rate (ER) by the equilibrium condition for the foreign exchanges market (eq. (45) and the thirdterm), and the interest rates of securities and loans (rs and rL) by thetwo equilibrium conditions in the financial markets (eqs. (33.2) and (33.
3) and the last two terms). There still remains one equilibrium condition in the model, i.e., eq. (33.1) (the fourth term above), which isredundant or not independent of the other equilibrium conditions due tothe aggregate identity above. It is for the cash currency with unitary
price or zero interest rate, so that the independent equilibrium conditions, when solved, give the absolute levels of prices and interest rates
jn equiljbrium. Eq. (33.1) is explicitly introduced into the model but
not actually used in solving the system. The demand for and the supply
ofcash currency match automatically when the markets for products, labor, foreign exchanges, securities and loans are all cleared through adjustments in the corresponding prices and interest rates. In other words,
the prices and interest rates determined endogenously for their absolute7) The aggregate identity below is a combination of fiow and stock variables so that the initial stock relations (at the end of the previous year), whether they are definitional identities or equilibrium conditions, are fully utilized
in deriving it.

6o Mrrsuo EzAkl
levels in the model are the ones that guarantee also the equilibrium inthe money market.8)
The labor market in the present model is a deviation from the puregeneral equilibrium system. As seen from eq. (9), the model assumes
the nomimal wage (W) to be downward rigid, making it impossible for thewage to decline below a certain minimum level (W). This minimum wage
level is set equal to the actual wage level in solving the system for1980 and applying it to the analysis of comparative statics in the next
section. In other words, the model adopts a labor supply function of
the Keynesian type, assuming the economy to be basically in underemployment equilibrium. The situation is illustrated in Figure 1 (CaseA), from which we can see that the model permits also a possibility offull employment where the wage rate is determined in such a way as toclear the labor market (i.e., Lci)=Lfi) in Case A). It is possible,
by a small modification of the model, to deal with the case of completely flexible nominal wage, as is illustrated also in Figure 1 (Case B).
In this case, totally unemployed labor force (in 1980) is regarded as`natural' or `desired' and excluded from the labor supply function, on the

one hand, and the labor market is assumed to be always cleared throughadjustments in the flexible nominal wage, on the other. Case A is considered as a standard case in the model, but the results of comparative
statics based on Case B will also be presented for reference purposesin the next section.9)

8) Money here means `cashsurrency in circulation' (ACB* )-bLut it may
be regarded as `narrow money' (ACB* +ADB*) or `broad money' (ACB* +ADB'+ATB*). Note that the supply of cash currency (ACB*) is treated as exogenous in the model. The independent supply behavior of this kind is crucial
in determining the absolute levels of prices and interest rates. If, for example, the supply of cash currency is endogenized in such a way as to automatically match to the demandfor it, then eq. (33.1) is no longer the equilibrium
condtion and the system cannot determine the absolute levels of prices and inter-est rates by the Law of Walras, resulting in the necessity of choosing oneof the prices and interest rates as numeraire. In the Korean CGE model byAdelman and Robinson [1979], the supply of money is explained as exogenous(p25) but only the demand for money appears in the system (pp. 206-225), assuming implicitly in the solution process that the supply of money is identicallyequal to the demand for money (pp. 239--243).

9 ), Average wage never declined in nominal terms throughout the postwar
period (except for 1958) in the Japanese economy, but it did decline in realterms recently in 1980. Whether money (i.e., nominal) wage was rigid or real
wage was rigid or both were flexible in the postwar period are discussed in de-tail in Kurosaka and Hamada [1984, Chapters 3 and 9]. In the present model,
8::.rg,o,"e.y,,w,asfi,`s,.a.sgg.m.e.d,t&,ge,.d.o.wn.w.aEgE,ti)d,ap,d,.i:a,.a,ct:•ei.i,evs.i(,kn,,l•g?Og.Ag

dition to the system to have been determined alfbady at the beginning of the year
(by such an occasion as the spring wage negotiation) based on the rates of unemployrnent and inflation, etc. of the previous year.

A COMPurABLE GENERAL E(?UILIBRIUM MODEL

OF THE JAPANESE ECONOMY
Fig.1.

Equilibrium in the

Labor Market

Lii)

W

L")

L(•2) L

/1

x

x

N

Å~

x

W(2)= W= W

/
x

Nl

-Å~---------

iN l!I
ixl/ lt--7xli--- ,W ----------->-7t/---3,-?!--gÅ~

At
W(2)

Li2)

/
Å~

Å~
ur" ) = PV( 1)Ls--------/ ili/IlI
1}l1
llIIt
tli

/

/

K,

:
,Nl

/

/

/

/

/

lfl

-----

/t

/,

K /ll
xl
xl
s
lx
l
5
Å~
l
N,
l
Nt

!l
I
'
1
xl

x

1tN

t

L(2) L ii LS L<S,)

Ls,
L= E] LiL")= L(Si)
Case A.

Downward rigid nominal wage

w

Ls

L

/
1
1
/

/

tu

/

-g

W-W

l/

/

y
:/I

/l

/

/l

:
l
,
L=LS

Case B. Flexible nominal wage under labor supply

excluding totally unemployed labor force

L s,

L =Åí Li

61

62

MITSUOEZAKIThe present model is not a pure general equilibrium system in which
prices (including exchange rate and interest rates) are alZ flexible andmarkets are all cleared by price adjustments. For several markets inthemodel, prices are given exogenously (or nearly exogenously) and supply-

demand equalities (not equilibria) are assumed to be attained by quantity adjustments mainly from the supply side. The labor market was an
example ' (though only for the case where the minimum wage constraint iseffective), and the demand for labor is assumed to be realized by the
supply adjustment, permitting the existence of unernployed labor (eqs. (9)and (10)). The second example is the market for crude oil (industry 3),
in which the domestic supply ratio is very small (less than 1%). For
this industry, domestic price is given by import price which is nearly
exogenous (eqs. (44) and (1)), while domestic production can be expanded
to any level without allowing for demand limitations (eq. (39)), andthe gap between total demand and domestic supply is filled by imports(eq. (41)). The third example is the markets for financial assets: de-mand deposits (AD), time deposits (AT), trade credits (AU), andother domestic financial assets (AO) (See Table 4). It is assumed
in each of these markets that demand is always matched by supply underthe exogenously given level of interest rate (eqs. (32.3), (32.4), (32.5)
and (30.4)). In other words, infinitely elastic behaviors are supposed
for the supply side. The final example is the markets for foreign products (i.e., imports) and foreign financial assets (i.e., net capital inflow or outflow). Based on the small country assumption, it is supposed in the model that Japan can import any amount of foreign products
without affecting their prices under the infinitely elastic foreign supp}y(eq. (41) and the exogenous import price PWMi). Similarly, Japanis supposed to be able to import (or export) any amount of capital without affecting its interest rate under the infinitely elastic foreign supply (or demand) (eq. (34.2) and the exogenous interest rate iF though
the latter is not explicitly used in the model).
So far have been comments and explanations on the general structureof the model. We will next discuss about more specific aspects of themodel, especially on the composite goods, the financial sector, and theexchange rate determination.
In the present model, domestically produced and imported goods are
not considered as homogeneous but as substitutes (except for industries
3, 9 and 10 with negligible domestic production or zero imports). Basedon the so-called `Armington' procedure, they are aggregated into a composite commodity in each industry (Qi), for which the domestic demand

ACOMPUTABLE GENERAL EQUILIBRIUM MODEL 63
OF THE JAPANESE ECONOMY

is supposed to arise and from which the demand for domestic goods (Di)and the demand for imported goods (Mi) are derived. In other words,
assuming an aggregation function of constant returns to scale (Qi=gi( Mi ,Di )) and using the identity in value (Pi Qi = PDi Di +PMi Mi), we get the price definition for composite goods (eq. (3)).
Assuming further the cost minimization behavior of the users or buyers
under a given level of the demand for composite goods (i.e., Qi=Zi+Ci+Coi•+Vi jn the model), we get the domestic demand for domestic
goods (Di) as well as the import demand (Mi) in each industry (eqs.
(39)-(41)). This approach and the related framework for the real industrial sectors in the model are closely in line with Dervis, De
Melo and Robinson [1982, Ch. 7]10)

The financial sector in the model (eqs. (27)-(34) and Tables 4
and 5) plays a crucial role in the determination of absol.ute price levels
as explained already. It affects also the real part of the system throughnet property income (eq. (13)) and private investments (eq. (22)), on the
one hand, and the price structure of the system through exchange rate (eqs.

(1), (2) and (45)), on the other. The specification of the sector basically follows Brainard and Tobin [1968] though the equity price anddynamics of adjustment are not allowed for here. All of the financial
assets are measured in nominal terms (neglecting the possibility of pricespeculations), so that only interest rates are relevant prices in the sec-

tor. There are several points to be especially noted for the specifica-tion here. First, government deficits are assumed to be domesticallyfinanced by both bond issues and borrowings under a constant allocation share between the two (eqs. (31.4) and (31.5))li) Second, all of
the foreign assets and liabilities are aggregated into a single concept(i.e., net foreign assets) due to the lack of data on detailed asset
categories, and the net demand for foreign assets in each sector (except
government) is derived as residuals since its sign alternates between
years especially in the sector of corporate enterprises (eqs. (29.8),
10) Note that this composite goods approach is concerned about total domestic demand for each industry. The approach can be replaced by the introductionof import matrix, which makes it possible to determine total demand for imports
Lfrom its disaggregate sources: intermedimate demands, consumption demands, investment demand, etc. The model, however, becomes far more complex in this caseespecially when the substitutability between domestic and imported goods is assumed individually for each of the disaggregate demand sources.
11) This specification is adopted for the purpose of doing comparative statics in a proper manner in the next section, where exogenous shocks are given to
government expenditures and tax rates.

64 MITSUO EZAKI(30.8) and (32.6))12) Finally, the central bank, banking institutions,and non-bank .financial institutions are not separated but treated asa single sector, for which an average behavior is specified in theirasset choices (eqs. (32.1) and (32.2))l3)

The determination of exchange rate in the present model (eq. (45))
follows the traditional approach: the exchange rate is determined in sucha way as to attain the supply-demand equilibrium in the foreign exchanges
market. In other words, the exchange rate in the model is the rate at
which the sum of current and capital accounts in the balance of payments
becomes equal to zero (where the capital account incorporates changes
in official reserves). This is the approach adopted by Mundell [1968(Chs. 17 and 18)] and Amano [1980 (Chs. 9 and 10)] in their theoretical analyses of employment and stabilization policies under the flexible
exchange'rate system, and also by Amano [1978, 1982 (Chs. 10-12)] in
his FLEX (flexible exchange rate) model for the Japanese economy.i4)
Note that the capital account in the present model (for the sign reversed) is derived as changes in the desired stocks of net foreign financial
assets (eq. (34)), but those desired stock levels are determined as residuals in the domestic sectors without allowing for any speculative elements in relation to the exchange rate expectations.
Most of the remaining equations in Table 3 seem to be self-explanatory, so that detailed explanations are skipped on individual equations,and only a brief summary is given on the simplifying assumptions and pro-cedures adopted in the model.
(1) Production, aggregation and utility functions are of CobbDouglas type with constant returns to scale. (2) Saving rate in households is constant. (3) Coefficients of intermediate inputs are con12) This may cause a relatively large error in solving the •system for thevariable of net foreign financial assets, especially when its level is not large
as in the case of households sector.

13) It is not possible to treat the three financial institutions separately
for the consistency between industrial and institutional sectors to be maintained. It may be desirable, however, to separate the central bank from other institutions at least in the institutional sectors for the purpose of analyzing

monetary policies in a more precise way. A theoretical analysis of Horiuchi[1980, Ch. 1] seems to be useful in considering such an extended framework.

14) The FLEX model is an econometric model which focuses strategicallyon the endogenization of exchange rate, allowing for a variety of flexible rate
systems. It gives a comprehensive explanation on the balance of payments andthe exchange rate (though the specifications for other part of the economy issuppressed to a necessary minimum). The method of exchange rate determinationin the FLEX model is called `demand-supply balance approach.'A COMPUTABIE GENERAL EQUIllBRIUM MODEL 65
OF THE JAPANESE ECONOMY

stant. (4) Industrial labors (employed, self-employed and unpaid family workers) are measured in terms of efficiency units based on relative
wages to overall average. (5) A discounting factor (1/4) is multiplied
to the number of self-employed and unpaid family workers in industry 1
allowing for job overlappings and working hours. (6) A constant shareand the same wage are assumed between employed and other workers foreach industry. (7) A constant share is assumed between households andcorporate enterprises for operating surplus. (8) Adjustment factors
are introduced into net property income due to the data inconsistency
between income, financial stocks and interest rates. (9) Imputed interest is attributed solely to corporate enterprises. (10) Net transfdr
receipts are assumed to be proportional to appropriate income. (11) A
constant share in depreciation is assumed between institutional sectors
other than financial institutions. (12) Government consumption and investment are regarded as exogenous in nominal terms. (13) Allocation
coefficients of consumption demand between industries are constant invalue terms for private consumption (due to the utility function of Cobb-Douglas type) and in quantity terms for government consumption. (14)Investments are assumed to be homogeneous irrespective of their origins and types, resulting in a single investment deflator. (15) Sharesof investment between types and between industries of destination are
constant in quantity terms. (16) AIIocation coefficients of investment demand between industries are constant in quantity terms. (17)Various demand and supply functions are sepcified in their simplest
forms with elasticities estimated by a very crude guess work as shown in
Table 5.
3.

Solution of the Model and Comparative Statics

The CGE model of the Japanese economy presented above is a system of non-linear equations consisting of 385 endogenous variables, 43
exogenous variables and more than 700 parameters. The model can be solved not only for any single year statically but also for any successive
years dynamically, provided that the data for exogenous variables andparameters are available. Here the model is solved only for the benchmark year (1980) from which most, of the parameter values are derived,
leaving dynamic simulations and comparative dynamics to be done in future. We will check, first, traceability of the model in the benchmark
year. Then, the model will be applied to comparative statics to quantitatively evaluate (1) the impacts of oil price changes, (2) the effects

66 rmSUO EZAKI
of fiscal and monetary policies, and (3) the direct policy measures in
reducing current account surpluses. Finally, a sensitivity test will
be made to check the stability in comparative statics under parametervalues different from those in Table 5.
Traeeability of the Model (Base Solution)
A variety of computational algorithms are now available to solve
general' equilibrium systems of non-linear type.i5) The Gauss-Seidel
method, which seems to be the simplest among others, is used to solve
the Japanese CGE model here. This method requires each of the equations to be expressed by an explicit function with only the dependent
vaciable on the left-hand side. In Table 3, the equilibrium conditions
are expressed in the form of implicit functions, so that Yhey are rewritten as follows with the corresponding prices on the left-hand side:(g)' vv =max{xctipNixiS/LS, IV}
ct;i-A-, Uas vv (x,D/K,,,)ti'Åë)tq + EP)JtiIii

1-b,i - (tdi -tsi)(AS: +AS.* )-(AS.+AS.)(33.2)' r. ==r,[-1]Å~[1+O.1Å~ ](AS.+AS.)(AL*H +ALc* +ALc' )-ALB(33.3)'r, =r,[-1]Å~[1+O.1Å~ ]AL.
(4s)'ER -ER[-1]Å~[i+o.ixXPWM'iM;+vv(MRiil[i;i(AtllilR+TRwiiiRP7;W.E)iEi+F")]

where ['1] means the previous iteration. The first two equations above
are solutions of the equilibrium conditions obtained by treating otherrelevant endogenous variables as given. The remaining three, on the other
hand, are formulated as adjustment functions, assuming that the equilibrium conditions are attained by adjusting prices (1/r, , 1/r, and ER)
positively when excess demands exist (or negatively when excess supplies
exist) in each stage of the iteration process.'6) The adjustment speed15) See Dervis, De Melo and Robinson [1982, Appendix B] and Shoven
and Whalley [1984, p. 1021].

16) A siinilar approach is used in the FLEX model for the determinationof exchange rate (Amano [1982, Ch. 10]), and also in ESCAP [1983] for thedetermination of product prioes (Annex ll ).

A COMPUTABLE GENERAL E(2UILIBRIUM MODEL 67
OF THE JAPANESE ECONOMY

here is set equal to one-tenth (O.1) of the discrepancy rate between de-mand and supply.
The solution of the model for 1980 is shown in Table 6 for key endogenous variables. It is called `base solution' since it serves as basein evaluating solutions under various shocks (i.e., `shock solutions').
The solution is derived for the case of downward rigid nominal wage
where the minimum wage (W) is set equal to'the actual wage level,in1980 (i.e., 3.054 million yen).It is needless to say that the solution,
which is obtained by solving the whole system without using the equilibrium condition for cash qurrency (eq. (33.1)), guarantees that equality
though up to the third effective numberl7)As seen in the table, the basesolution traces the actual fjgures quite well especially for the pricevariables. However, the base solution indicates a slight but steadyunderestimation for the quantity variables. This is due to an ad hocprocedure adopted here to mitigate the data inconsistency between I080

and NAS represented by the fact that GDP in I080 is bigger by
2.3% than GDP in NAS (241253.3 versus 235911.5 billion yens).
That is to say, the industrial productions and the labor supply are ari's and 7Sat thetificially made smaller to some extent by setting Anelevels smaller by one percent than their original ones. Otherwise, thebase solution will result in a steady underestimation for the price variables. The base solution indicates a relatively good traceability ofthe model also for the value variables except net financial assets offoreigners (AF.) and net capital inflow from abroad (Ew). Gaps fromthe actual figures are not small for the two variables. However, thegaps do not seem to be very large considering the fact that the two variables are derived as residuals which may possibly accumulate errors inother parts of the system.'8)
The solution of the model for the case of flexible nominal wage isshown in Table 7. The base solution in this case is more or less thesame as in Table 6 with one important exception: the labor market isperfectly cleared (r.,=O.O) under the equilibrium wage level (3.0364
million yen) which is a little smaller than the actual wage in 1980.
17) The convergence criterion is l/10ooO on the average for 385 endogenous
variables. Under this criterion, about 100 iterations are needed to get basesolutions, while 100-1000 iterations to get shock solutions (for Tables 6 to11).

18) Errors may occur especially in the linkage part between flow and stock

variables. In NAS, reconcilliation accounts are provided between capital
finat1ce
accounts (flows) and balanee sheet accounts (stocks) for the institutional sectors. The model here does not allow for those reconcilliation accounts.

68 rmSUO EZAKI
Comparative Statics : Oil Price Changes
Impacts of oil price changes on selected key endogenous variables
are also presented in Table 6 (for the case of downward rigid nominalwage). We will investigate the results mainly from the point of viewof the oil shocks (i.e., the Iast two columns in Table 6).
A comment is necessary on the exchange rate (ER) in the first place.
The oil shocks result in the yen depreciation in the new equilibrium
through the following process. The yen is depreciated, first, by increased trade deficits caused by the oil price increases. This yen depreciation is however, counteracted by increasesin exports (E) and decreases in imports (M) due to the depreciated yen itself, on the one
hand, and by increases in foreign capital inflow (Fw) due to a tendency

toward deficits in the domestic institutions (YH, Yc, YB, YG andS) and a corresponding tightening in the domestic financial markets (r.
and r,), on the other. In the new equilibrium, the yen depreciates by

1.77% for the 10% increase in oil price and by 9.64% for the 50%
increase in oil price. In other words, the exchange rate elasticity
with respect to oil price changes (ceteris parthus) is about O.2 according to the model here.

The oil shocks give stagflationary impacts to the economy, causing inflation (PCH, PCc, PI and PDi's), reducing outputs and employment (GDP, Xi's and L), and increasing unemployment (r.,). Notethat GDP deflator (PGDP) is not a proper measure of inflationin the case of oil shocks or import price shocks, since its definition(eq. (48)) includes as negative terms the value of imports (price Å~ exchange rate Å~ quantity) in the numerator while the quantity of imports
in the denominator, permitting the possibility 'of its decrease for thecase of import price increases19)Note also that, though stagflation due
to the oil shocks must be analyzed from both supply and demand sides(Shinkai [1980]), the suppiy side is often regarded as more important
than the demand side as is stressed in Bruno and Sacks [1981]:"Accelerating goods prices and increasing unemployment suggest the co-existence19) The rate of increase in GDP deflator (2.6%) was far smaller thanthose in consumption and investment deflators (6 •y 7%) for 1980, while they
were approximately the same (20.6% and 21'hv26%' respectively) for 1974. Notethat Tables 6 and 7 indicate pure effects of oil price changes. Actual prices
are influenced not'only by oil price changes but also by fiscal and monetary pol-icies as seen from Tables 8 and 9. A rapid increase in GDP deflator in1974 seems to be related with expansionary fiscal and/or monetary policies
around that year. See Moriguchi [1983] for the detailed analysis of Japan's
macroeconomic policies in the 1970's.

A COMPUTABLE GENERAI. EQUILll3RIUM MODEL 69
OF THE JAPANESE ECONOMY

of demand pressure in the commodity market and excess supply in the labor market.

... An increase in the price of a variable factor of production, such asoil, may reduce profits, output, and the input of other variable factors, suchas labor, unless their relative price adjusts downwards. . . . Such a recession can further be exacerbated by restrictive domestic demand management, which
may be required to combat inflation and rising current account deficibs, . . .
It is precisely because of the existence of demand-induced elements that it isal1 too easy to attribute all of the unemployment to Keynesian factors, although a large part of it is really of a "classical" nature. That part can only
be eliminated by a fall in real wages or increased capital accumulation, neitherof which is likely to occur in the short run." (p. 16)

What is implied in Table 6 is closely in line with this analysis ofreal supply shocks?O) In Table 6, however, the nominal wage is assumed
to be rigid downwards. The real .wage, therefore, can fall but only toa small extent, resulting in a significant increase in unemployment.
In the case of flexible nominal wage, on the other hand, the labormarket is cleared by a fall in both nominal and real wages under the oil
price increases as shown in Table 7. The negative impacts of oil shocks
in this case are relatively smaller for most parts of the real economy,

especially on real GDP. For the households sector, not only inflationary pressures (PCH) but also declines in real consumption (CH)and real income (YH/PCH) are smaller in this case. The flexible
wage, therefore, seems to attain a better performance than the rigid
wage under the situation of real supply shocks from both growth and welfare points of view at least in the short run.
Comparative Statics : Fiscal and Monetary Policies

Effects of various fjscal and monetary policies are summarized inTable 8 for the case of downward rigid nominal wage. In the table,
shocks of one trillion yen or their approximate equivalents are given to
government fiscal measures (C.", I,", i5F., Z5I,, i5I, and iZli's) and 'tomonetary instruments of Bank of Japan (AC." and ASBi)• For thegoverment fiscal measures, negative effects on government budgets causedby the shocks are assumed to be automatically financed from domestic
sources through bond issues and borrowings (See eqs. (31.4) and (31.5)).

On the other hand, the open market operation is assumed for the monetary instruments, equating the increase in the supply of cash currency20) The effects of oil price increases are different, of course, between
industries, depending on the cost and demand structures in each industry. Decreases in output are relatively large in the industries with high oil inputs
such as industries 5, 10 and 11, while the effects of oil shocks are relatively
small or even positive in the industries with high export demands such as industry 7 due to the yen depreciation. Industry 3, of course, increases its output
under the oil bonanza.

70 MrrSUO EZAKI(A-t.*)with the increase in the Bank of Japan's purchases of govern-

ment bonds (A-S.J)?i)
From Table 8 we can derive several observations on the nature and'charachteristics of various policy measures. First, the government fiscal expansion, whether it is by means of consumption or investment, gives
favorable effects to many parts of the economy (as is expected under the

existence of unemployed resources such as labor). It causes increases
in employment, real private consumption, real GDP, industrial productions (with a few exceptional industries), sectoral income and so on,
reducing the rate of unemployment significantly. It causes even thedecrease in private consumption deflator partly through yen appreciation
but mainly through declines in domestic prices in most industries due
to supply pressures. Effects on industrial productions are different
depending on the mean of fiscal expansion. The industry which is affected most is services (XiS3) in the case of consumption increases,
while it is constructions (Xg) in the case of investment increases.
GDP multipliers, however, are almost the same between the two means:
about 1.4 in nominal terms and about 1.1 in real terms.22)
Second, the monetary expansion is quite similar to the fiscal expansion in its effects on quantities, but quite opposite in its effects
on prices. It gives positive impacts to almost every part of the real
economy (probably not to a small extent judging from the amount of given
shocks). However, it gives inflationary impacts to almost every aspectof the economy, accompanying significant declines in the two interest
rates and the value of yen. Its positive impact on real GDP is caused
mainly by export expansions due to the yen depreciation (which lead to
output expansions in export industries such as machinery (X7S )) but also

by increases in private investments (Ip=IH+Ic+IB) due to theinterest rate declines and other positive factors related to profits.

Third, effects of tax reductions are quite similar to those of the
expansionary fiscal policies but only for the categories of personal income taxes and indirect taxes. Reductions in the indirect taxes, however, include an important exceptional effect: declines in all of theprices including GDP deflator. For the category of corporate income21) Note that the cash currency here is almost equivalent with high poweredmoney (which is often called reserve money, base money or monetary base). The
former is smaller than the latter by the following two components: deposits with
the Bank of Japan and currency held by banks. See footnote 13.

22) They are 1.7 and 1.0,respectively, according to the macroeconometricmodel of Japan constructed by M. Ezaki and C. Moriguchi (See Ichimura
and Ezaki [1985, Ch. 10]).

A COMPUTABLE GENERAL EQUILIBRIUM MODEL 71
OF THE JAPANESE ECONOMY

taxes, on the other hand, effects of tax reductions are almost the sameas those of the monetary expansions (but only with a far smaller degreeof impacts). This asymmetry between corporate income taxes and othertax categories seems to be closely related with the assumption of downward rigid nominal wage.23)
Note that both of the fiscal and monetary expansions result in theincreases in real GDP and employment (with GDP multipliers greaterthan one for the case of fiscal expansions) under the framework of fiexi-

ble exchange rate here. This result is contradictory to the theoreticalconclusion of Mundell [1968, Ch. 18] (which is based on the assumptionof perfect capital mobility). It is, however, consistent with the the-oretical analyses of Amano [1980, Ch. 10] and Dornbush and Fischer' the imperfect capital mobility) as well•[1981, Ch. 19] (which allow foras with the empirical results of FLEX model (Amano [1982, Ch. 12])for the Japanese economy. In the case of fiscal expansion, increases
in government consumption (CG) or investment (IG) are almost cancelled by decreases in exports (E) and increases in imports (M) due to the
yen appreciation accompanying foreign capital inflows (jF'w), but theother domestic final demands, private consumption (CH) in particular,
increase significantly at the same time, resulting in the GDP multipliers greater than one. In the case of monetary expansion, on the other
hand, all of the final demand components (except government) contributeto the increase in real GDP but the most important contribution comesfrom foreign trades, i. e., increases in exports and decreases in imports
due to the yen depreciation accompanying foreign capital outflows.2`)
According to the present model, both of the monetary and fiscal policies are effective under the flexible exchange rate system but only
for the situation of underemployment with the downward rigid nominal
wage. When the wage rate is completely flexible and full employment is
attained (allowing for a certain amount of `natural' or `desired' unemployment),both of the monetary and fiscal expansions lose their effec-

tiveness on real GDP (in the short run) as shown in Table 9. The
23) Table 9, which corrensponds to the case of flexible nominal wage, indicates symmetric effects for the three tax categories. Relatively small effects
for the category of corporate income taxes in Table 8 seem to be closely related with the specification of investment functions (eq. (22.1)), by which tax
reductions can directly affect the real economy through profit rates (eqs. (21.1)-(21.3)). A relatively low level (O.1) of elasticities is assumed for the profit rates since the system does not converge when it is greater than O.5.

24) See Kurosaka and Hamada [1984] for the problems of policy mix under
the flexible exchange rate system with particular referenoe to the Japanese
economy (Ch. 12, pp. 264-267).

72 MrrSUO EZA"
fiscal expansion causes only the compositional changes in real GDP
and industrial productions under an inflationary tendency, while the monetary expansion affects the real economy only slightly even with a lesssevere inflation. Whether the wage rate is flexible or rigid is, therefore, crucial for the evaluation of various policy measures. This should
be so since whether the wage rate is flexible or not corresponds exactly,
in the model, to whether the economy is in full employment or in underemployment. In the present paper, the downward rigid wage is considered as the standard normal case for the Japanese economy at least in
the benchmark year 1980.25)

Comparative Statics: Measures to Reduce Current Account Surpluses
Japan is now (at the time of 1985) criticized severely against its
huge trade surpluses and various policy measures are proposed to makethe surpluses smaller. The model in this paper can provide a roughevaluation of the effects of such policy measures based on the short run

comparative statics for 1980. The results are presented in Table 10
for several selected direct measures such as tariff reductions, importsubsidies (i.e., negative tariffs), export duties (i.e., negative export

subsidies), and increase in ODA grant. Note that the current balanceof payments (-Fw) is the target variable here and that increase in
ODA grant is identified with increase in net transfer payments abroad(See eq. (15.4)).

As seen in Table 10, a considerable decrease in surpluses (actually,an increase in deficits for 1980) is expected by the tariff reductions
to zero levels in all industries (the first column). The amount of decrease is estimated as 2.6 billion US dollars (=637.6/242.0/1.0118),of which the contribution from manufacturing industries is dominant (thefourth column).The effects of tariff reductions are generally favorable for the aggregate economy with real GDP and real consumption increased while unemployment rate reduced. Reductions in tariffs further
to the negative levels (i.e., import subsidies) have similar but stronger
effects as expected (the fifth column). Unexpectedly, however,the imposition of export duties does not contribute to the decrease in current
account supluses but does to the increase (the sixth column). This isbecause imports (IL(D decrease more than exports (E) due to the domes-

tic recession according to the model here. The increase in ODA
grant just causes almost the same amount of decrease in the current account surpluses with only a small impact to the aggregate economy. Pol25) See footnote 9.

A COMPUTABLE GENERAL E( !UILIBRIUM MODEL 73
OF THE JAPANESE ECONOMY

icy measures discussed above are all directly related with the current
balance of payments. These direct measures can be used either independently or in combination with such indirect measures as fiscal and mone-tary expansions and various tax reductions, whose effects on the current
account surpluses are already presented in Table 8.
Sensitivity Test for Cornparative Statics

The results of comparative statics presented in Tables 6 to 10
are all based on the elasticities in Table 5 derived from a very crude
guesswork. The results may change depending on the elasticities. The
problem is to what extent the results will change under different valuesof the elasticities, i.e., the degree of stability in eomaparative statics based on the present model. A sensitivity test is made to checkthis stability for the case of 10% decrease in oil price, assigning afairly different parameter value to each of the elasticities. The results are presented in Table 11 only for the aggregate variables. Comparing the first column with the remaining ones in the table, we can seethat the model provides quite a stable result on the comparative statics. There exist, however, two minor exceptions. One is the private
investment (Ip) under bigger investment elasticities (the fifth. column),
where the sign is reversed. The other is the rate of unemployment (r.,)
under smaller asset elasticities (the last column), where the rate inshock solution is a little bigger. Though they are only minor exceptions in Table 11, the former indicates a problem in the investment
function while the latter in the traceability of the model in relation
to the asset choice functions.
Sensitivity tests of other kinds are not attempted yet. However,
the results of comparative statics in Tables 6 to 10 seem to remain
more or less the same in many parts under different parameter values aswell as different specifications, unless the changes in parameters and/or specifications are drastic.26)•27)

26) Fairly drastic changes in specification are incorporated into the present model corripared with the previous one (Ezaki [1985]) as explained in footnote 1. Yet, the two models give very close results on comparative statics (un-der the flexible nominal wage) for most of the price and quantity varjables.

Compare Table 7 of this paper with Table 3 of the previous paper for thecase of 50% decrease in oil price, using O.0403 as the rate of change for thenumeraire (PGDP) in the previous paper.

27) The survey of Japanese macroeconometric models by Saito and Moriguchi [1985] is very useful, in this context, from which we can get a rough ideaon the Teasonable ranges in various parameter values as well as on the possible
ranges in irnpacts under various shocks.

MrrSUO EZAKI74

4. Concluding Remarks
The CGE model of the Japanese economy presented here has a wide
applicability to various policy problems not only in the industry levelbut also in the aggregate national level, dealing with each of the problems from both levels in a consistent way. This is possible since themodel has a firm basis on the data and methodological framework of the

new SNA. The financial sector, in particular, may be emphasized asa key element in the present model (probably as a new element in the
CGE studies), without which the model can neither determine the absolue level of prices nor analyze the monetary aspects of the economy
such as inflation.

The model has been applied to the analysis of comparative statics
under various external shocks, resulting in reasonable implications ineach case, but only for the benchmark year. Comparative statics forother years or comparative dynamics for successive years are, of course,
possible based on the present model, but not attempted yet due to thedata problems in exogenous variables and parameters. It is difficult
to get data directly for the exogenous variables of industry level in theyears other than the benchmark. Some of the parateters estimated fromthe benchmark data may change not to a small extent in those years.
Among others, technological change in each industry is crucial in the dy-

namic context. A further elaboration of the model as well as a careful
work on the data base are, therefore, necessary toward the dynamic application of the present model, which is the next step in the author's

CGE study of the Japanese economy.

A COMPUTABLE GENERAL E([2UILIBRIUM MODEL
OF THE JAPANESE ECONOMY
Table1. Sectoral Classification

Industrial

Sectors:(sectoral code of72Å~72 IO table)

L

Agriculture, forestry and fishery, andmining other than coal and petroleum

Ol - 05, 07, 09

2

Coal

06

.

Crude petroleum and natural gas

08.

Pulp, paper and chemicals

24, 25, 29 - 34

5

Petroleum refinery and coal products

35
36
'

6

Metal

38-43

Machinery

44-49

Other manufacturing

10-23, 26-28, 37, 50

Construction,

51-53

Electricity and gas

54, 55

Transportation and communication

61-63

Banking and insurance

58

COmmerce, real estate, public and otherservices, water supply, and others

56, 57, 59, 60, 64-72

3

4

7
.

8
9
10

.

.

11
.

12
13

.

Institutional

H.

Sectbrs:

Households (including private unincorporated non-financial
enterprises and private non-profit institutions
serving households)

C.

Non-financial incorporated enterprises

B.

Financial institutions

G.

General government

W.

Rest of the world

75

76

MIITSUO EZAKITabte 2. Notation of Variables

Endogenous Variables

Price Variables:

PDi=domestic price of industry i

PNi=price of net product- (value added) of industry iPi=price of composite goods for domestic products and imports ofindustry i

PMi=import price of industry i

PPVEi== export price of industry i(in terms of US dollars)PIi== deflator of investment (production capital) in industry iPI=deflator of gross domestic fixed capital formationPI'=deflator of investment on public capital (=Pg)

PJ
PCH== deflator of inventory investment=deflator of private consumption expenditures

PCG=deflator of government consumption expenditures

PCo== deflator of consumption expenditures outside households

PE=deflator of exports of goods and services

PM=deflator of imports of goods and services

PGDP == deflator of gross domestic product (GDP)rKk=rate of return to capital in sector h(h==H, C, B)

rs== interest rate of securitiesrL== interest rate of loansW== wage rate (average annual income of employees)

ER=exchange rate (\/$)

Quantity Variables
X,s.

== domestic production of industry i

X,D.

=total demand for domestic production of industry iMi=imports of industry i

Ei=exports of industry iDi=domestic demand for domestic production of industry iVi=intermediate demand for composite goods of industry i

Coi== consumption demand outside households for composite goodsof industry i

A COMPUTABLE GENERAL E(l!UILIBRIUM MODEL
OF THE JAI}ANESE ECONOMY
Ci= private and government consumption demand for composite
goods of industry i

Zi=investment demand for composite goods of industry 'idi=ratio of domestic supply in total domestic demand forcomposite goods of industry iLi== total employment of industry i (in terms of efficiency

units based on the wage ratios between industries)
Lsi=number of self-employees and unpaid family workers ofindustry i (efficiency units)

Lei=number of employees of industry i (efficiency units)

Ls== total labor supply

UL==

total unemployment

ruL

==

rate of unemploymentli=gross investment on production capital in real terms ofindustry i

Ki=gross capital stock (production capital) in real terms ofindustry i
I=gross domestic fixed capital formation in real termsI'== gross investment on public capital in real termsJ=inventory investment in real terms

lk=gross investment in real terms of sector h(le=H, C, B, G)

lk=inventory investment in real terms of sector le (h=H, C)

Kk
KJk=net capital stock in real terms of sector h(le= H, C, B, G)

Co=consumption expenditures outside households in real terms

C.

=private consumption expenditures in real termsCG=government consumption expenditures in real terms

E= exports of goods and services in real terms

M=imports of goods and services in real terms== inventory stock in real terms of sector h(le==H, C)

GDP == gross domestic product in real terms (real GDP)
Value Varibles

RL= compensation of employeesRK=operating surplus

RKk=operating surplus of sector le (kDK=depreciation of fixed capital

DKh=depreeiation of fixed capital of-H, C, B)
sector le (le=H, C, B, G)

77

78 lwn'SUO EZAkl
RAk ==net property income of sector h(le==H, C, B, G, wr
RIIc ==imputed interest (attributed to sector C)

RTk =net transfer income of sector le (le=H, C, B, G)

Yk =disposable income of sector h(le=H, C, B, G)
Sk ==net saving of sector le (h=H, C, B, G)
GDP" ==gross dornestic product (nominal GDP).=net worth of sector h(h=H, C, B, G)
MVk==net financial assets of sector le (le==H, C, B, G)
ANk
ACk , ACh"=currency in sector le (assets and liabilities)

ADk,ADk* =demand deposits in sector le(tt)ATk, ATk* =time and saving deposits in sector le (")

ASh,ASk* =securities in sector le(t,)
ALk,ALk* ==loans in sector le(tt)AUh,AUk* =trade credits in sector le (")
AOk,AOk* =other domestic assets in sector le (" in net terms)
AFk ==net foreign financial assets of sector le (le==H, C, B, G)

AFw =net financial assets of foreign sector (in Japanese yens)
Fw =increase in net financial assets of foreign sector(in US dollars)'
Exogenous Variables
Price Variables:

PVVMi --import price of industryi(in US dollars)
PVVi =world price in the export market of industry i(in US dollars)

rD ==interest rate of demand deposits
rT ==interest rate of time and saving deposits

rR =reserve ratlo
rBJ ==interest rate of Bank of Japan loans

W =minimum wage rate in nominal terms
Quantity Variales:ji<7 . ==population over 15 years of age

Jh =real inventory investment by sector h(le==H, C)

A COMPUTABLE GENEImu. E([)UllilBRIUM MODEL
OF THE JAPANESE ECONOMY
Value Variables:

RLw ==net labor income of foreign sector (in US dollars)
RTw =net transfer receipts of foreign sector (in US dollars)
ATIti- lr=supply of currency by Bank of Japan

ALBJ= loans by Bank of JapanAS BI=government bonds purchased by Bank of Japanc' cn=nominal government consumption expendituresl- .n==nominal government investment expenditures

A O.

=other domestic assets (in net terrns) in sector G

AUg =trade credits (liabilities) in sector G
AF.

=net foreign financial assets of sector G

Parameters
Taxes and subsidies:tmi=import tariff rate of industry itei=export subsidy rate of industry i

tdi=indirect tax rate of industry i

tsi=subsidy rate of industry itYk=income tax rate of sector le (h=H, C, B)

Shares and rations:SH

savmg rate of households sectorWHi== value share of industry i's product in private consumptionqGi= quantity share of industry i's product in government consumption
expendituresqoi=quantity share of industry i's product in consumption expenditures
outside householdsh== quantity share of investment on production capital in grossexpenditures

domestic fixed capital formationhi=quantity share of industry i's investment in total investment

on production capitalSIi=quantity share of industry i's product in gross dornestic fixed

capitai formation
Sl'i=quantity share of industry i's product in total investment
on public capital

79

80

MITSUO EZAKISJi== quantity share of industry i's product in total inventory

mvestmentsii== quantity share of industry i's product in investment on

production capital of industry j== share of self-employees and unpaid family workers in totalliemployment of industry i
2i= ratio of industry i's wage rate to overall average rate (VV) to

be used to transform original employment (L' ) to employment
in efficiency units (L)VKH== share of operating surplus (excluding imputed wages) of

VDk=share of depreciation of sector le (h=H, C, G)

UTk=ratio of net transfer receipts to income in sector lehouseholds sector(h-=H, C, B)

Functional Parametersii"=intermediate input coefficient from industry i to industry J'

5o ,'== input coefficient of consumption expenditures outside

households in industry J'
E.j== rate of depreciation in industry J'

Ai, di= parameters of Cobb-Douglas production function for industry iBi, fli=parameters of Cobb-Douglas aggregation function for composite
goods of industry i

Ei, nyi=parameters of export detand function for industry i

7S, E=parameters of labor supply function

Ik, 6k,•==parameters of gross investment function in sector le(le-H, C, B)-eai k, ei l•k=parameters of asset choice function in sectorle (le-H, C, B, G)

A COMPUTABLE GErvERAL E( !UIUBRIUM MODEL

OF THE JAPANESE ECONOMY
Tabte 3. System of Equations

Price Identities(1) PMi =PWMiQ+tmi) ER(2) PVVIEi=PDi/Q+tei)/ER(3) Pi =(PDi+PMiMi/Di)/gi(Mi/Di,1) (i>f3,9,10)
where gi(M;,, Di) =BiMi P` Dl-P`

P, =PM,
Pi -PDi (i==9,10)(4) PNi =PDi-XPjaji-boiPDi-(tdi-tsi) PDi
ProdtLction and Equilibrium in the Labor Market(5) Xf' ==fi(Li, Ki,o)=AiLff•iKii,la` where Li=aiL;(6) PN,(OXiS /OLi) =W or L,= ct, PN,X, /VV(7) Lsi --liLi, Lei=Q-li) Li(8) LS/N = IS ( VV/ PC cbe

N -v -(9) ELi -- LS (and W== W) if VVI-}ir W, or

l7V==il} (and ELif.{;;LS if iVSii},

where AVV" is the wage rate which equates ELi with LS.

(10) UL =LS-Z'L,, r.,-UL/LS81

82 MITSUO EZAKIDistributed Incorne and lts Components
Aggregation in value aalaled iterns:(11.1) RL = VPi (LS- XL,i ) -RL. ER if

RL = VV (LS- UL- XL ,,) -RLwER

iiV2-)vTt or
if iiilt{:fiIl.

(11•2) RK =i (PNi XI -W Lei) -DK(11.3) DK =EbDiPIiKi,aOperating surplus by sector:(12.1) RK. = .S VV L,,+v.. [(RK-XWL,,) -RK.](12.2) RKc " a'vKH) [(RK-EVVLsi) -RKB](12.3) RKB = (PNi2Xf2-VVLe,i2 ) 'DKB-IJVLs,i2
Net property income by sector:(13.1) RAH/zH== rD ADH, e+ rT ATH,o+ rs AS H,e+ rD AO H, e

+ rF AFH,e - rL AL E, e (zH==1 .6)

where rF== (rD+ rT + rs+ rL) /4(13.2) RAc/zc= rD ADc,o + rT ATc,e + rD AOc,o + rF AFc,e- rs AS t,e -rL AL c*, a, (zc==1.3)(13.3) RAB/ZB== rs ASB•,o +rL ALB, o + rF AFB,e-rDADB*,e-rTATB',e-(rD+rr)/2'AOio(13.4) RAG/ZG= rD ADG,e + rT ATG,o + rT AOG,a + rF AFG,e-rs ASG*,o -rL ALi, (zG-.9)(13.5) RA w ER =- (RA H+ RAc+ RAB + RAG )(z.= .9)

A COMPurABLE GENERAL EQUILI]BRIUM MODEL

OF THE JAPANESE ECONOMY

Imputed interest:(14) RII, =RA. (Rll. -O)
Net transfer income bN sector:(15.1) RTH =uTH(RL+RKH)(15.2) RTc =uTc RKc(15.3) RT. =u.. RKB(15.4) RTG =' (RTH+RTc+RTB+RTvrER)
Pisposable income bN sector:(16.1) YH = (1-tyH) (RL+RKH+RAH+RTH)(16.2) YTc == Q-tyc) RKb+Rllc+RAc+RTc(16.3) YB == (Z fftyB) RKB-RUc+RAB+RTB(16.4) YG =:tNH(RL+RKH+RAH+RTH) +tycRKc+tyBRKB+XtmiPIJVMiER Mi -XteiPVVEiER Ei+x (iEl',-il,,) PD,Xi +RA,+RTG
Depreciation by sector:(17.1) DKB =bD,i2PIi2Ki2,e(17.2) DK, ==v.,(DK-DK.) (le=H, C, G)
Saviug and Consumption
Net saving by sector:(18.1) S. =sHYH

83

84 MITSUO EZAKI(18.2) Sc =Yc(18.3) S. =Y.

-n -(18.4) SG =YG-CG (or YG-PCGCG)
Real consumption expenditures:(19.1) C. =S w.i (1 -s.) Y./Pi (E ct) .i =1 )-n -(19.2) CG -CG/PCG (or Cc)(19.3) Co ==XbojPDjXi' /PCo
Consumption cleflators:(20.1) PC . = (1 -s.) Y./ CH(20.2) PCc ==SqGiPi ("Sqci=1)(20.3) nco = "S qoiR (`2 qoi =1 )Investment and Capital Stocle

Rate of retum to capital (after tax) by sector:(21.1) rKH= [a-tyH) (RKH-aSWL,i)+DKH+(PI-PI,)KH,,]/PI,KH,,(21.2) rKc = [Q-tyc)RKb+DKc+(PIptPIe)Kc,o]/PIoKc,e(21•3) rKB = [(1-tYB)RKB+DKB+(PI'PIo)KB,e]/PIoKB,eGross capital forrnation by sector:(22.1) Ik =ik rO.K,k r,OLkr.eShGDp"Xk (h--H, c, B)(22.2) I, =:Ii?6/PI (or I-(22.3) J, =J, (le=H, diG)

A COMPUTABIE GEMiRAL E(!UILIBRIUM MODEL

OF THE JAPANESE ECONOMY

Net capital stocle by sector:(23•1) Kk =Kk,e+Ik-DKk/PI (k=H, C, B, G)(23•2) KJk =KJk,o+Jk (le=H, C)
Total investrnents and investment deflators:(24.1) I ==IH+Ic+IB+Ic(24.2) PI ==XstiPi where sii--XsiihJh+sGi a'h)(24.3) tJ =JH+cJc(24.4) PJ =XsriPi
Gross fixed capital forrnation- by indttstry:(25.1) Ij =hjhl(25.2) PIi --"E'si,•Pi(25.3) I' =- Q-h)I(25.4) PI' =="E's'iiPi (==Pg)
Gross capital stocle for prodttction by industry:(26) Kj = Kj ,o +lj (j =1 • •••• 13)
Equilibriurn in the Financial Marhet

Net worth by sector:(27•1) NWH =NVVH,o+SH+ (PI-PIo) KH,e+ (PJ-PJo) KJrH,o(27•2) NVVc =NVVc,e+Sc+ (PI-PIe) Kb,e+ (PJ-PJe) KJc,e(27•3) NVVB =NWB,e+SB+ (PI-PIo) Kfi,e(27.4) NWc ==NVVG,e+Sc+ (PI-PIe) KG,e85

86 MrrSUO EZAKINet financial assets by sector:(28.1) ANti =NW.- (PI Kti+PJ KJ.)

(28•2) ANc =:NWc- (PI Kc+PJ KJc)

(28.3) AN. =;NVV,-PIK,(28.4) ANG ==NVVc-PIKc
Asset choice by households:(29.1) ACH/NVVH =acH(rD, rT, GDP)
(29.2) ADH/NWH ==aDH(rD, rT, GDP)
(29.3) ATH/NVVH ==arH(rD, rT, rs, GDP)

(29.4) ASH/NWH ==asH(rD, rT, rs)(29.5) AOH/NWH =aoH
(29.6) ALZ/ (PI KH+PJ KJH) =aTH(rL)(29.7) AUH'/ (PI 1{h+PJ KJH) =au"H(29.8) AF. =ANut(AC.+AD.+AT.+AS.+AO.)+(AL.*+AU.*)
Asset choice by corporate enterprises:(30.1) ACc/NVVc =acc(rD, rT, GDP)
(30.2) ADc /NVVc =aDc(rD, rT, GDP)
(30.3) ATc/NLVc ==aTc(rD, rT, GDP)

(30.4) AUc =AU"H+AUc'(30.5) AOc /NWc ==aoc(30.6) ASZ/ (PI Kc+PJ KJc) =as*c (rs, rL)(30.7) AL,'/ (PI Kb+PJ KJc) ==aL*c (rs• rL)(30.8) AFc =ANc- (ACc+ADc+ATc+AUc+AOc)+(ASZ+AL:)

A COMPUTABLE GENERAL EQumBRIUM MODEL 87
OF THE JAPANESE ECONOMY

Asset choice by general governmet:(31.1) AD, =a.GNVVG(31.2) ATG =aTG NVVG

(31.3) AO. =AOc
(31 .4) AS *c -- zs [( ADc + ATG+ AOG + AFG )- AUX - ANG ] (zs =• 815)

(31.5) ALc' = zL [(ADc+ATc+AOG+AFc)-AUZ-ANG] (2L =•185)(31.6) AU,* --AUX(31.7) AFc =AFG
Asset choice by financial institutions:(32.1) ASB ==asB(ts/rBJ,rb/rBJ) [a-rR) (ADX+ATTB)+AOI+ALBJ]+ASBJ(32•2) ALB =aLB (ts/rBi, rL/rBJ) [a -m) (ADI +A Ti )+A Og +ALBf](32.3) ADT ==ADH+ADc+ADc(32.4) ATig =ATH+ATc+AT6(32.5) AOX ==AOH+AOc+AOG(32.6) AF. =AN.- (AS.+AL.) + (ACg+ADtr+ATX+AOif)
Equilibriurn for financial assets:(33.1) AC.+ACc-ACtr(33 .2) AS .+ AS.- AS ,* + AS.*(33.3) ALB =AL if +ALc* +AL c'
Dernand for foreign capital (Net financial assets of sector W):(34.1) AFw =- (Al7H+Al7c+AFB+AF6) [stoch in yens]=- (ANH+ANc+ANB+ANG) [ex post equality](34.2) F.ER=AF.-AF.,, [flow in alollars]

88 !vilTSUO EZAKI
Equilibrium in the Prodttcts nt Foreign Exchanges Marleets
Demand for prodtrcts by industry:(35) Zi =Esiilj+slil'+sJicJ(36) Ci =(DHi (1-sH) YH/Pi+qGiCG(37) Coi =qoiCo(38) Vi =EajiX9'
Demand for domestic products and imports:(39) Di

D3
Di(40) did3di(41) Mi=di(Zi+Ci+C.i+Vi)==(ibÅéi3 , 9, 10 )XbS

=zi + ci +coi + vi

(i-9

= 1 /gi(Mi /Di , 1 )=1 /B i( Mi /Di)P`( i ><i3

'

10)

'

9,10)

= D3/ (Z3+C3+Co3+ V3)- 1 (i-9 , 10)=Åë(PDi/PMi) Di= fii/ a - fii) (PD i/PMi) Di(ik3 ,9,10)

where Åëis' the solution for Mi'/Di of the marginal

condition: (agi/aMD / (6gi/aDi) =PMi/PDi•

M3Mi(42) Ei

Ei(43) X9•= (Z3+C3+Co3+V3) -D3-O (i-9,10)--

Ei (PVVi /pwTEi )ni-o=Di+Ei

10 )

'

3 9

'

'

3

'

( i tsc2

(i =2

'

'

9

10 )

A COMPUTABLE GENERAL E(!UILIBRIUM MODEL89

OF THE JAPANESE ECONOMY

Equilibrium for products and foreign exchanges:(44) Xf• -XP• (its<i3)

PD3 =PM,(45) EPWIMi Mi + (RL w + RA - +RTw) -XPVVEiE rFw = O
GDP Definitions(46) GDP" =YH+Yc+YB+YG+DK+ (RLw+RAw+RTw) ER=X (PDi-XPjaji-boi PDi) XF•+X (tmi /1 +tmi) PMi Mi-X (tei/1 +tei) PDiEi= EP,(C, +Zi)+ ia /1 + te,)PDiEi - "Sa /1 +tmi)PMi M,(47) GDP == X Ci +XZ, + .Xa /1 + te f• )E,- XQ /1 + tmg• )M,

where te:, tm7• =base year levels of tei, tmi(48) PGDP -GDP"/GDP(49) E =Za/1+tef•)E,, PE -Xa/1+tei)PD,Ei/E(50) M =EQ/1+tm:)Mi, PM =XQ/1+tmi)PMiMi/M
VVarlas' Lau)

E pDi(x9• -xF• ) +vv[x (L,,+L,,) -LS]i-3+ER [XPVVM, Mi + (RL.+RA.+RT.) -XPWIE, E, -F.]

+ (.XAC,-ACif) + (EAS,-XAS:) + (AL,-XAL,*) -O[N.B. The second term above is to be dropped when VV= VV.]

Note:

Stock variables are measured
iables with subscript o mean
the end of the previous year.

at the end of each
initial stocks, i.e.,

Stock varstock levels atyear.

muSUO EZAKI

90

Table 4.

Financial

Assets and Liabilities

Accounts *Liabilities

Assets(O (B)(m(O (B)(AC, )

AC.

ACc -(AD, F.)

AD.

ADc -

ADc

- ADX

(A T, rT )

AT.

ATc -

AT.

b AT.*(AS, rs )

AS.

- AS.

(G)

(m

(G)

. AC'.

(AL, rL)

- AL.

AL.*

(AU, ru)

AUc -

AUrr

(AO, ro)

AO.

AOc -

AO.

(AF, rF)

AI7.

AllF'c AFB

AF.

ASc' ALc" -

AS.*

AL.*
Any
Ul

- AO.*(AN.)(ANc ) (ANB )*The model does not explicitly use the last three interest rates: ru, ro
and rF, which are proxied by other relevant rates in case of necessity.
Note that this table does not exactly correspond to the aetual accountsof Bank of Japan. This is because some of the domestic assets andliabilities above are in net terms, and all of the foreign assets andliabilities are aggregated into a single concept: net foreign assets.

(AN. )A COMPUTABLE GENERAL EQUILIBRIUM MODEL
OF THE JAJ?ANESE ECONOMY
Table 5. Functional Parameters Derived from a Guess(Constant Terms and Elesticities) 'Labor supply [eq. (8)] :IS =O.5931, e=+O.1
Exports (i==1...13) [eq. (42)] :Ei =actual figure, oi =+1.0
Gross investment (le=H, C, B) [eq. (22.1)]

Ik = actual figure

6Kk =+O.1, 6,k=-O.1, 6.k- -O.1,6xh =+O.5(32)] :

Financial assets and liabilities [eqs. (29) -Sector H. aiH

ei]'H

(rD)

(rT)

(rs)

(rL)

(GDP)

acH

o .0427

-O.5

-O.5

+1 .0

aDH

o .0783

+1 .0

-O .5

+1 .0

a TH

o .5486

-O.5

+1 .0

asH

o .0978

a oH

o .1277

aTH

o .6267

a VH

o .1517

Sector c:

-O.5

+1 .0

-O.5
+1.0
-1 .0

eil' c

aic
(rD)

(rT)

(rs)

(rL)

(GDP)

acc

O.O131

-O.5

-O.5

+1 .0

a Dc

O.2470

+1 .0

-O .5

+1 .0

aTc

O.4503

-O.5

+1 .0

+1 .0

aoc

O.0397

a tsc

O.1595

-1 .0

+O.5

a Tc

O.7833

+O.5

-1 .0

Sector B:

aiB

e

i)'B

(rs/rBl)(rL/rBI)asB

o. 1827

+1.0

-O .5

a LB

o. 8147

-O.5

+1 .0

* Constantterms are all based on actual figures.

91

MrrSUO EZAKI

92

Table 6. Comparative Statics (1980): Effects of Oit

Prioe

Changes on be1ected Endogenous Variables
Discrepancy rates between shockand base solutions

ActualER

PWM3 changed by-10% -50%-O.0907
O.O053

O.O177

O.O183 #-O.OO05 *-O.OO05 *-o.oooo #-O.O022 *-O.OO19 *O.0308 #O.OO05 *O.OO04 *-O .O058-O .O023-O .O053-O .0286-O .O088-O .0245

O .O027-O.Oos5-O.0504
O.OOII-O.0430-O.25os

O.OO03
O.O074
O.O133O.O023O.OOIO
O.O054-O.O071
O.O133
O.O055
O.O066
O.O074
O.1733

O.oo09O.0290O.0652
O.O088O.OO13142094.4
2ea28.4
60728.4
14691.434543.3
37059.6241253.3

525147.751656.8
136629.7
237ce.160600.3
14643.0
en359.4
36194.4235426.5

GDpn 235911.5
170951.1
YH

235893.7
1os690.2

PCff

PCG
PI

1 .0000
1 .0000

PE

1.0000
1.ooOOPM
PGDP 1 .0000
525253.5
K52734.5
L
CH
Cc

Ip
IG

E

M
GDP
Yc
YB
YG

1704.12232.41797.12351.929686.043523.030915.2
43286.9Al7w-2791 .2-3929.3
2004.9

s

Fw

PD1
PD2
PD3
PD4
PDs
PD6
PD7
PDs
PDg
PDio

PDl1
PD12
PD13
Xls
X 2s
X 3s

X4s
Xss
X6s
X7s
Xss
Xgs

X1 oS
X1 IS

X12S
X13S

2577.11.00001.00oo1.00001.0ooO
1.00001.00001.0000O.os461.0042
O.9970O.9978
O.99661.00391.0033O.9os51.00saO.98861.0018
O.99761.0014

18357.9

18059.0

254.6
100.1

250.0

27701 .4

26955.2
17512.046142.4
73040.2
71161.9

1 .0000
1 .0000
1 .0000
1 .0000

1.0000
1 .00oo

17906.2
46390.4
74428.1
73226.4
55257.3
11597 .737254.5
15804.1
176761.7

os.1

M472.211337.336224.3
15377.8
171659.2#Level of shock solution.

PWM3 changed by+10% +50%o.o-O.O156

rUL
rL
rs

Xf

solution

O.997O
3.0scO
O.0249O.os23e.oso61.00011.00131.00331.0022
O.99691.00201.00003.0540O.020
O.0827
O.08201.0000

W

PDi

Base

O .O120

O.O052
O.O170- 826.8*- 810.8*-O .O050-O.O036-O.1140-O .O131-OL0865-O.Ol18-O.O052-O .O062-O.O054-O .0263-O.O161
O.OO18-O.O020

O.O049O.OIOI-O.1366
O.O059O.0223
O.OO08-O.OO07
O.O072
O.O022

O .O094

O .0251-O .0498

o.o

O.O064
O.O060O.O092
O.0532-o.oooa-O .OO02-O .O067-O.O131-O.O027-O .OO04-O .O059

O.Oee4o.oOD5ea #

O.O025 *O.O021 *o.oenoO.O156
O .03gg

O.0489O.2831-O.O023-O.OOIO-O.0329-O.Oan9-O.O153-O.OOIO-O.0318

O.O084-O.O129-O.O051-O .0255-O .O059-O .0278

O.0553
O.0216
O.0786-O.O068-O.1656-O.Ol11-O.O040-O.O154-O.0332-O.8177-O.0546-O.O171-4024 .9 *-4239 .8 *818.1 *

771.5*

4094.9 *3570.2 *-O.0245-O.O143-O.5453-O.0635-O.4105

O .O058

O.0321
O.0256-O .0575

O .O129
O .O059

O.0796
O.0211
O.0307
O.0348
O .8298-O.0247-O.0296-O.0240-O.1230-O.0759
O.OI07-o.ooos
O.O155O.O043
O.1194
O.O143
O.0912
O.O070O.O059O .0290-O.7277

O.O172-O.OO14
O.O024-O.O043-O.O077
O.1381

O .02!7-O .O054

O .0427

O .0452-O.0607-O .0737

O .6445
O .0783

O.4947
O .0705

O.0326
O.0384
O .0327

O.1650O.0934-O .oo59

O.O136-O.0213-O .0305
O .7033-O .0270-O .0203
O.1292-O.oa92-O.OOOI-O.O052
O.OO03
O.OO14
O.oo86-O.O120-o.ooos-O.0338
O.0304-O .OO18-O.oo88
O.oo77
O .Ol16-O.0550-O.Ol13
O.0546-O .0533
O.Ol14-O.OI09
O.0512-O .02ng
O.O056-O.O051
O.0222-O .0287-O .O057
O.OO60O.0247*Difference between shock andbase solutions.

A COMPUTABLE GENERAL EQUILIBRIUM MODEL
OF THE JAI)ANESE ECONOMY
Table 7. Comparative Statics (1980): Effects of

Changes - The Case of Flexible Nominat

93

Oil Price

Wage **-

Discrepancy rates between shockand base solutions

ActualER

1.oooo3.0540rL
rs

O.0827
O.0820W
rULo.o

solution

PWM3 changed by-10% -50%

3.0364-O.0243
O.OI08-O.1l75
O.0450-o.oooo-o.oooo #-o.oooo #-O.OOI1 *-O.oo12 *1 .0020

O.0822
O.0805
O.9970O.9974
O.9999O.9se41.0020O.9975-ODoo2*O .OO03

142094.4
2eaas.4
60728.4
14691.434543.3
37059.6241253.3

525142.4
51827.2
136746.7
23890.960548.014693.634629.4
36113.8235985.1

235911.5
170951.1235397.3
1os313.3

yz

1704.12232.4

1788.32349.2sYG

29686.043523.0

so892.943181.5

AFF
ww-2791.2
2577.1-3994.6
1929.6O.OI05
O.Ol15O.1ee3
O.O140O.O064
O.0213- 706.2*- 674.4*

ÅíBs

1 .0000
1 .0000

O.9819
1.oo10

O .O023

1.00oo1 .0020-O.1219

1 .0000

O.99621.0004-O .O099

PCH
PCG

1 .0ooO
1 .0000
1 .0000

PE

1.ooOOPI

PM 11.0ooO
PGDP .0000
525253.5
K527en.5
e.
IC.G
i.G

gDP
GyD
.pn

SB:
ÅíB:

PDi

Base

P.D
.Z

1.0000
1 .0000
1 .0000

1 .0020

1.00oo1.oo02
O.9957ÅíB?o

1 .0ooO

1 .0001ÅíBll

1.00001.0000PD13

1.00ooO.gg91O.9992
O.9939
O.9973Xls

18357.9

18120.7

254.6
100.1

252.2

27701.4
17906.2
46390.4
74428.1
73226.4
55257.3
11597.737254.5
15804.1
176761.7

270gg.8
17550.846298.2
73297.971293.054476.1
11352.936310.4
15415.6
172073.2

1 .0000

kg
ilEgg
iiiigg

Xis

l:g
Xlos
XlIS
X12S
X 3S

99.2

-O.oo03 *-o.ooooO.O049O.OOII-O.O033-O.0587
O.O095
O.oo11
O.Ol15-O.O049
O.O026-O.OOII-O.0211
O.O171O.OOIOo.oooo-O.0924-O.Ooa1
O.OO06-O.OO09
O.OO16-O.0271-O.Ol13
O.O088
O .O056-O.OO15-O.O057-O.1551
O.Ooo1
O.O181-O.O054-O.O072
O.O035
O.O020O.O089O.O068
O.OO09O.oo14

PWM3 changed by+10% +50%
O.0261-O .OIOI-- o.oooo #O.OO02 *O.OO03 *-o.ooss

O.OO09O .O183
O .OOOI-O .O041-O.0229-O.2750
O.0403O.OOIO
O.O051
O.0560-O.O180
O.O082-O.ooOl-O.0968
O.0939O.O042
O.0446

O .O043
O .0623

O .0489

O.83M

O.0612
O.0262
O.0928-3449.7 *-3644.2 *-O.O052
O.oo87-O.5ss7-O.0495-O.4204-O.0421-O.oo23-O.O089
O.O023-O.l214-O.0556
O.0362
O.0212-O.Oos6-O.O155-O.7644-O.OO06
O.1116-O.0271-O.0342
O.O157
O.O069O.0434
O.0319O.oo45
O.oo69-O.OOOI-O.O086-O .OO02-O.OO11-O.Ol17
O .O041-O.O020
O.Ooo1
O.0217-O .O165-O,OO12-O.O098-O.OI09-O.1767-O.OIM-O .O054-O.O199720.7 *

O.1526-O.0431

o.o "O.OO13*
O.OO12 *O.O151-O.OI02
O.O121
O.0339O.3563-Q.0336-O.OO06-O.oo59-O.0617
O.OI03-O.O020-O.O120
O.1148-O.0765-O.O074-O .04os-O.0475-O.8503-O.0605-O.O149-O.0843

ssee.6*652.0*

31 18.6 *O .OOIO

O.O174
O.O064
O.7289O.0754
O.5615O.os51
O.O143O.02soO.OIOO
O.1891
O.0843-O.0315-O.O135-O.OO15
O.1287
O.Ol14
O .0982
O .O095

O.oo04
O.O020-O.OO05
O.0302
O.O129-o.ooos-O .O047

O.OO15
O .O070

O.O068
O.0426

O.1594

O .8571-O .OO02-O.oo23-O.0723
O.0309O.0415-O.O189-O.oo45-O.0446-O.0366-O.O048-O.OI04-O.O167
O.O057
O .O075-O.O036-O.OO16-O .O090-O.O070-O.OO09-O.OO16**Minimum wage (VV) equals zero and labor supply excludes totally unemployedlabor force in 1980. #Level of shock solution. #Difference between shock andbase solutions.

94

lvilTSUO EZAKI
Table 8.

Comparative Statics (1980): Effects of Fiscal andMonetary Polioes on Setected Endogenous Variables.'*c.nl,: A C#, ASBit),Ht),C, tYB

tdi(i -= 1. .13)

increased

increased increased

changedchangedbybychanged

by

-7%b

-9%b

-6%b

ER

-O ,0200

O.0356-O.O149o.oo.oO.O027o.o-O.oo60
o.o

rUL
rL
rs

O.Olee #-O.ooOl *O.ooOl *o.o

O.O186 #O.O135 #O.O195 #-o.oooo *O.OO02 *O.0232 #O.OOOI *O.OO04 *O.O188 #-O.OOOI *O.ooOl *-o.ooos
O.OOII-O.OO18-O.O024-O.O181-O .OO17-O .OO05

O.OO08
O.OO06
O.OO08O.OOIO
O.O027
O.OO06
119.9
84 .5-O .O028

96.7
-14.8

1265 .0

PIPE

PM O.OO15.
PGDP
129.3
E
338.9
CH
CG

Ip
IG

E
M
GDP
GDpn
YH
Yc
YB
Yc

3.g;

983.6
971.7
99 .3

25.9

PD2
PD,
PD,
PD,
PD6
PD,
PD,
PD
9
PDio

PD
ll
PD
12
PD
13
ilfig

x2s
x3s
x4s
i:g
lig
g•l;•i-O.OOOI *O.oo02 *-O.OOOI-O.OOIO-O.O023-O.0200

O.OO141142.6sa1.1
1100.83.3

122.4
1012.5-O.Ooo7*-O.OOIO*
O.Oos4
O.O056
O.Oos2O.OIOI
O.0356
O.Oon2

550.3
559.5
241.3
- 132.2
679.1- 119.4- 639.1- 610.3

867 .3

460.1

548.3
1080.51423.6
1076.8
183.8
17.0
227.2
632.6
506.8
558.6

- 2sa.3-O.OO16-O.O021-O.0200

1081.41435.31075.8
196.4

17.7

240.0
- 341.5

423.7
469.7

*'

by

•+1ooo.o + 2so.oa

PCH
PCG

x9•

by

+1000.0-O.O181
o.o

W

PDi

by

-O.OO18-O.O023-O.O181-O.O028-O.O147-O.O039-O.O023-O.O022-O.OO15-O.O023-O .O030

O.O020O.OO14

11.3
- 2.3
- 2.1
47.8
58.2

- 158.2- 280.3
288.2
115.2
47 .8
141.5
66 .2
1495.6-- O.O035-O.O162-O.O031-O.OO17-O.O024-O.OO04-.O025-O .O034

O.OO17
O.OO02
39.0
- 2.5
- 2.3

38.0
75.3

40 .3
18.6
421.0
780.9
54 .4
142.4

53.9

767.3

O.OO07-O.OO13-O.oo17-O.O149
O.OO14111.8
287.1
1729 .5

-17.0

90 .2
18 .3
- 453.8

133.0

-12.4
57 .6

448.5
918.9

251.3

1101 .2

1247.52043.2167.6
21 .9- 908.4- 330.7

385.1
261.3
914.8
142.4
- 942.7
164.2- 180.4- 243.6

419.9
467.8

18.6
13.2

O.OI02
O.O083
O.0356
O.O132-O.OO04-O.OO15-O.O149-O.OO18-O.Ol19

O.OOII
O.OO08O.O027
O.OO13O.O025
O.OO13
O.OO09O.OO09o.ooosO.O022O.OOIO

1775 .4
2787 .9

1719.4
199.0
34 .0
541.5

O.0315•

O.O133
O.Oco2
O.Oco6
O.O076
O.0208o.elosO.Oos3
O.O051
213.0

7.1
3.8

266.2
126.9
636.3
1030 .2

479.8
400.2
51 .3
269.4
118.3
950.5

-O .O028-O.OO16-O.OO12-O.OOIO-O.OOOI-O.O021
O.oo25O.OOIO

55.8
- 1.5

- L8

68.6
75.6

- 110.2- 179.4
441.8
97 .0

56.5

193.2

69.2

1006.48.9

O.OO08
O.OO06
27 .1

O.7
O.3

33 .9
21 .3
74 .9
115.4

83.9

87 .0

9.4

41 .0
17 .0
156.9

-O.OO18-O.O029-O.oo35-O.O060-O.O024
106.1
335,2
42 .4

60.5
42.9

-86 .3251.8
1072.8509.71077.3225.3
24 .7- 693.1- 238.4
242.7
257.0-O.oo19-O.OO18-O.O060-O.O029-O.O123-O.oo32-O.O035-O.O053-O.oo27-O.OO18-Q.oo35-O.OO05-O.OO17

99.0
O.7
- O.5

126.6
110.4
60 .7
100.0
503.9

93.6

ss .6
204.4
76 .5
939.0

* Discrepancy rates for price variables and differences for quantity and value variables.

#Levelofshocksolution. *Differencesbetweenshockandbasesoluctions. aApproximately
equivalent with one-trillion-yen increase in narrow money supply (Ml) in 1980.
bApproxirnately equivalent with one-trillion-yen tax reductions in 1980.

A COMPUTABLE GENERAL E(2UILIBRIUM
MODEL

95

OF THE JAPANESE ECONOMY

Table 9. Comparative Statics (1980): Effects of Fiscat
Monetary Polices -The Caseof Flexible
Nominalc,nincreased

by

by

by

t), H

tYC, t),B

changedchangedbybytdi(i-1..13)

changed

by

-7%

-9%

-6%

{.0285-O.0237
O.co79-O .OO07

O.OI04-O.O142O.OIOOo.oooo #O.OO02 *O.OO03 *-o.oooo #O.OO02 *O.OO03 *-o.oooo #-e.oool *-O.Ooo3 *-o.oooo #O.OOOI *O.OO02 *O.O048O.O081
O.O045
O.O027-O.0266
PGDP O.O096
139.9
28 .9
L
758.7
CH
801.2
CG
195.7
Ip
IG
-66.1
-1011.2
E
601.2

O.O039O.O069O.O052
O.O028
O.O096

O.O051
O.O048O.O054
O.O055
O.O084
O.oo471149.2

184.3

33.2

- 2.2

W
rUL
rL
rs

-1000 .0-1000.0-O.0266
O.OI05

PCH
PCc
PI
PE

77.2

81.4

2342.01751.9210.52322.11235 .7

O.O032
O.O057
O.O030O.OO15-O.0237
O.O073108.3
24 .3
1562.2- 136.4
143.9-44 .3- 873.7
578.4
73 .4
1797.91748 .4

716.7

2472 .4

197.9

47.7

169.6
23 .8
- 9os.7- 243.6
523.6
582.1
O.O027
O.O025-O.0237-O.OO02

PM
K

M
GDP

GDP"
YH
Yc
YB
YG

s
Al7w

Fw

Xis

AC*B, ASBJ

increased

Wager**+ 250.0
O.Oos5O.O047

ER

PDi

I6

increased

and

PDi
PD2
PD3
PD4
PDs
PD6
PD7
PDs
PDg

PDie
PDl1
PD12
PD13
Xls
X2s
X3s
X4s
Xss
X6s
X7s
Xss
Xgs
X1 os
Xl IS
X1 2S
X1 3S

22.5

-O .0285

879.1- 162.9
216.7

918.7

-1081.3
688.9

21.8

280.0
- 154.0
539.8
606.2
O.O031
O.O037-O.0266
O.OO03-O.0211-O.OO03
O.O034
O.O030O.O052-O.O032
O.oo17
O.O088O.O087

266.6
818.5
620.2
693.8
O.O033O.O037-O.0285-O.oo04-O.0226
O.oo04
O.O039O.O027
O.O062

-99.8
- 6.1
- 4.1

-71.7
- 6.3
- 4.3

-O .O034

O.OO12
O.O084
O.O074- 102.9- 111.7

-10.9

6.3

- 435.4- 737.2

44.3

104.5
19 .2

-15.7
-13.3

- 236.4- 437.4
179.1
768.5

26.0
-13.6
-14.2
17.8

- 119.5- 113.1
263.2-78 .4
102.4

-64.7

119.4

10.2
154.6
348.7

-62.1

-77 .6
O.O053
O.O052
O.Ooa4
O.oo56
O.O078O.O058O.oo55
O.O054
O.O054
O.O059O.O055O.O047O.O048

6.1
O.5
O.4
- 1.0
- 6.5

-O .O188-O.OOIO
O.O022
O.O021
O.O036-O.O020
O.OO08O.O073
O.O062-40 .8

- 4.9
- 3.5

-61 .5

16.1

59 .6
110.5

- 358.2- 587.2
234.3

100.2

79.4
32.5

-30.0
- 3.3

-13 .2

- 1.6

59 .8

11.0

388.3
- 133.7
7sa.2** See footnotes to#Level of shock solution.
Table 8 and Table 7.

between shock and base solutions.

O.O044-o.oooo#

O.Ooo3 *O.OO07 *O.O035O.O039o.oosaO.O035-O .OO07

O.O043
215.0

4.5

89 .6

-92.6

269.3

-56.4

- 144.3

90.9
-25.3
990.2
707.7
1747.610.0-o.oooo #O.Ooo1 *O.OO02 *O.O026
O.O050O.oo31
O.OO14-O.O142
O.O054117.6
38 .4
1048.0- 118.0
154.2-45 .2- 5sa.6381.9
118.61381 .4

1723.4238.5

29.3-1549.7
342.4- 655.2

93.1

351.6
383.7
O.oo28O.O036-O.O142
O.OOOI-O.O184
O.OO02
O.O020-O.OO04-O.oo37-O.oo27
O.OOIO
O.O060O.O053

94 .3
O.O036
O.O034-O.OO07
O.O030O.OOOI
O.O032
O.O037
O.O034
O.O040O.O026
O.O032
O.O041
O.O039
- 6.3
- O.7
O.6
-13.0

3.2
- 8.8
-29.1
37;6
149.4

-59.9

- 7.5
- 2.9
- 2.4
-17.8

43 .8
- 204.6- 338.1

269.2

83.8

3.7
- Q.9

31 .0
53 .6

- 2.1
-60.9

214.8

10.8

' DiffereneeTable 1O.

Comparative Statics (1 980):

Zero tariff
rates in allindustries(tmi=o.o,Zero tariff
rates ln

agriculture(tMi =O.O)

Effects of Variou6 Pol icy Measures on the Current Balanoe of Payments (Zero tariff

rates mpetroleum(tM3==O.O)

i=1,3'-"8,13)

ER

O.Ol18o.o

O.OO08o.o-O.oo22

rUL
rL
rs

O.O196 #o.oooo *O.oo03 *K).O021O.0247 #o.oooo *o.oooo *-O.Ooo1
O.Ooo1

O.0215 #-O.ooOl *o.oooo *

W

PCH
PCc
PI

PE

PM
PGDP
K
L
CH
Cc

-O .OO02

Ip
Ic

E

M
GDP
GDpn

YH
Yc
YB
YG
s

AF.
-Fv

O.OO02-O.O020-O.OO16
O.Olll-O.O039
O.OO02
O.O057
O.O077
O.Ooo9O.O020O.O134
O.O175O.O041O.OOOI
O.O056
O.1104
O.O092-O.0340-O.O150666.7 *

- 637.6*-o.oooo
O.Ooo1
O.OO08-O .Ooo2

o.ooooO.OO02
O.OO03-O.OOOIO.OOOIo.ooooO.OO08o.oeogO.OO02-o.ooooO.OO02
O.O032
O.OO04-O.oo15-o.ooos
35.9*-34.3*o.o-O .OO13-O .Ooo3-.oo12-O .O022-O.oo21-O.OO12

O.ooOlO.oo36
O.oo49-O.OO03
O.OO09O.oo12o.ooooO.oo39O.oo26
O.oo14
O.oo36
O.0720O.oo56-O.Ol18-O.O025140.6*- 145.6*-Fw) **

Zero tariff
rates ln

Import subsidies of 1% inExpor duties
of 1% in all

manufacturing(tmi=o.o,manufacturingindustries(tmi=-O.Ol,(tei=-O.Ol,ODA grant by
O.1% of GDP(TRw:

i=-4-8)i=4'v8)i==1A"13)+250.0)O.O130O.O153

O.O063

O.OO18O.0232 #O.ooOl *O.oo03 *-o.ooos

O.0229 #O.OOOI *O.OO03 *O.0268 #o.oooo *-O.ooOl *O.0244 #O.OOOI *O.ooOl *O.oo05-O.Ooo8
O.OO06
O.O130-O.O025o.ooooO.OO18O.oo24-O.OO05-O.OOO1
O.oo08
O.O125
O.O125
O.OO12-O.OO13
O.OO17
O.0340O.O031-O.0204-O.Ol17-O.oo06
O.Ooo5-O.OOIO
O.Ooo5
O.O153-O.O029o.ooooO.O022
O.O028-O.oo05-O.OOO1
O.co10O.O148
O.O146
O.OO15-O.OO14
O.O021
O.ca11
O.oo37-O.0240-O.O137

O.oo04-o.ooooO.OO04O.OI05
O.O063
O.oo09-O.ooOl-O.O020-O.O024o.oooo-O.oo06-O.Ooo4-O.oo42-O.O049-O.OO14-O.oo05-O.oo20-O.0355-O.oo29
O.O086
O.oo30O.Ooo4
O.OO03
O.OO04
O.OO05
O.oo18
O.OO02o.ooooO.OO04o.oooo-O.oo03
O.oo03-o.ooooO.oo13-O.oo05
O.oo03
O.OO05
O.OO04
O.O041o.ooos-O.O073-O.O047- 453.4*- 527.5*

180.3 *

- 233.8*

o.o

483.9 *** Figures are all discrepancy rates except for those with # (level of shock(-Fw) should be divided by 242.0 to get figures in terms of US dollars.

o.o564.6 *

solution)o.o- 1os.3*

and those with *ooIncrease ino.o237.2 *

(difference).

K
:ca
c
o
m
"
:

Tab{e 11 . Sensitivity Test: Comparative Statics (1980) under Different Parameter Values

in the Case of IQ% Deorease in Oil Prioe (PWM3 changed by -10%) "Parameter(s) in Table 5 chang'ed as:Parameters
shown in
Table 5 ##e -o.oER-O.O156

rUL
rL
rs

O.O183 #-O.OO05 *-O.oo05 *

W

o.o

PCH
PCG

-O.O058-O.O023-O.O053

PI

PE

PM
PGDP
K
L
CH
CG

Ip
IG

E

M
GDP
GDpn
YH
Yc
YB
YG

s

AF.
Fw

-O .O085-O.0504
O.OOII
O.OO03
O.O074
O.O133O.O023O.OOIO
O.O054-O.O071
O.O133
O.O055
O.O066
O.O074
O.1733
O.O120O.O052
O.O170- 826.8*- 810.8*

eiJ•k xO.5

vi =2.0(i-1...13)(k-H, C, B

) (i!i9.i,giEik)-O.O155-O.0206-O.Ol19-O.O137-O.O170

O.O177 #O.O170 #O.0264 #-O.OO07 *-O.OO06 *

o.o

o.o

o.oO.O191 #-O.OO05*

O.O171 #-O.OO06 *-O.oo05 *-O.OO05*-O.oo05*-O.oo04*-o.ooss-O.O023-O.oo53-O.O085-O.0504
O.OOII
O.OO03
O.oo74
O.O133
O.oo23
O.oo10O.O054-O.O070
O.O133
O.O055
O.O066
O.O074
O.1735
O.O121
O.O052
O.O171-O.O063-O.O025-o.oogg-O.O090-O.0550
O.OO13
O.OO03
O.O082O.O146
O.oo25
O.oo11o.ooss-o.ooss
O.O162
O.O060O.oo73
O.O082
O.1875
O.O132
O.O061
O.O190-O.O054-O.O022-O.O050-O.O083-O.oo70
O.oo10
O.OO02
O.O067
O.O122
O.O022
O.oo08O.O050-O.oo74
O.Ol16
O.oo50O.O059O.O067
O.1613O.OI09O.O046- 826.4*- 810.5*- 901.9*- 887.6***Figures are all discrepancy rates except for those with"#The same as in Table 6.

6ih Å~2.0

ni --o.s(i=- 1...13)

O .O154- 764.0*- 748.7*

i-K' , L, S, X

go.o

-O.Ooo5*-O.Ooo5*-o.oose-O.O023-O.O052-O.Ooa3-O.0485
O.OOIOO.OOO1
O.O068
O.O125
O.O023-O.OO06
O.O052-O.OOM
O.Ol18O.O051

O.Oos1 .
0.0069O.1592
O.Ol14
O.oo46
O.Olss- 871.2*- 8632*# (level of shock solution) andko.o-O.O061-O.O025-O.O056-O.O088-O.0514
O.OO09O.OO02
O.O069
O.O130O.O025
O.OO07
O.O056-O.Oos3
O.O134
O.O051
O.O061
O.O069O.1754
O.Ol13O.O045
O.O159

gE
!g
i'i'

gg
ii
Sp

- 816.7*- 819.1*

those with ' (difference).

E{ilMrrSUO EZAva

98

References[1]I. Adelman and S. Robinson, Income Distribution Policy in
Developing Countries: A Case Study of Korea, Oxford: Oxford Univ. Press, 1978.

[2] A. Amano, "Makuro Moderu niokeru Kawase Reto Naiseika no
Kokoromi (An Attempt to Endogenize the Exchange Rate in
Macro Models)," Kilean Gendai Keizai (Contemporary Econornics), No. 33, Winter 1978, pp. 86-104.

[3]A. Amano, Koleusai Kinyu Ron (International Financial Economics), Tokyo: Chikuma Shobo, 1980.

[4]A. Amano, Nihon no Koleusai'Shushi to Kawase Reto (TheBalance of Payments and the Exchange Rate in Japan), Tokyo:
Yuhikaku, 1982.
[5] P. Amranand and W. Grais, "Macroeconomic and Distributional
Implications of Sectoral Policy Interventions: An Application to Thailand," World Bank Staff Working Paper, Number
627, 1984.

[6]W. C. Brainard and J. Tobin, "Pitfalls in Financial Model
Building," American Economic,Review, 58 (2), May 1968, pp.
99- 122.

[7] M. Bruno and J. Sachs, "Supply Versus Demand Approaches to
the Problem of Stagflation," in H. Giersch (ed.), Macroeconomic
Policies for Growth and Stability: A European Perspective,
Tubingen: Mohr, 1981, pp. 15-60.

[8]K. Dervis, J. De Melo and S. Robinson, General Equilibrium Models for Development Policy, Cambridge University
Press, 1982.

[9]R. Dornbusch and S. Fischer, Macro-Economics, 2nd edition,
McGraw-Hill 1981.
'[10]A. Drud, W. Grais and D. Vujovic, "Thailand: An Analysis of Structural and Non-Structural Adjustments," WorldBank Staff Working Papers, Number 513, 1982.

[11]Economic Planning Agency, Shin Kohamin Keizai Keisan no
Mihata Tsuhaihata (How to See and Use the AIew SIVA),Tokyo: Government Printing Office, 1978.

[12]ESCAP (Economic and Social Commission for Asia and thePacific), "The ESCAP/ESI Model for Thailand," Report for Project No. 79/GEN/DP/3, June 1983.

[13]M. Ezaki, "Nihon Keizai no CGE Moderu (A CGE ModelA COMPUTABLE GENERAL EQUILIBRIUM MODEL 99
OF THE JAPANESE ECONOMYof the Japanese Economy)," in C. Moriguchi (ed.), Enerugii
nihansuru Kezaigahutela' Kendyu (Econornic Stu(ties on Energy),

Report of Special Project Research on Energy under Grantin-Aid of Scientific Research of the Ministry of Education,

Science and Culture, March 1985, pp. 44-69. (Forthcoming
in S. Hayashi and T. Nakamura (eds.), Nihon Keizai no
Toleei Bunselei (Stasistical Analysis of the Japarbese Econorny), Tokyo: Univ. of Tokyo Press.)[14]A. Gelb, "Oil Windfalls and Development Strategies Exercises with a Model of Indonesia," World Bank, mimeo., 1983.
[15]A. Horiuchi, Nihon no Kinyu Seisaleu (l7inancial Polieies
in cJapan), Tokyo: Toyo Keizai, 1980.

[16]S. Ichimura and M. Ezaki (eds.), Econornetric Models of
Asian Linh, Tokyo: Springer-Verlag, 1985.

[17]Y. Kurosaka and K. Hamada, Maleuro Keizaigaleu to Nihon
Keizai (Macroeconomics and the Japanese Economy), Tokyo:
Nihon Hyoronsha, 1984.

[18]C. Moriguchi, "Japan's Macroeconomic Policies During the1970's," in F. G. Adams and B. G. Hickman (eds.), Global
Econometrics: Essays in Honor of Lawrence R. Klein, Cambridge, Mass.: MIT Press, 1983, pp. 282-295.

[19]R. A. Mundell, Internationai Economics, New York: Macmillan, 1968.

[20]G. Pyatt and J. I. Round, "Social Accounting Matrices forDevelopment Planning," Review of Incorne and Wealth, Series
23, 1977, pp. 339-364.

[21]G. Pyatt and J. I. Round, "Accounting and Fixed PriceMultipliers in a Social Accounting Matrix Framework," Economic Joumal, 89, December 1979, pp. 850-873.

[22]M. Saito, lppan Kinleo to Kahaku (General Equilibrium andPrices), Tokyo: Sobun-sha, 1973.

[23] M. Saito, "Finance and Economic Growth: The Japanese Experience," in F. G. Adams and B. J. Hickman (eds.), Global
Econometrics: Essays in Honor of Lawrence R. Klein, Cambridgre, Mass.: MIT Press, 1983, pp. 296-313.

[24] M. Saito and C. Moriguchi, "Nihon Keizai no Makuro Moderu:

Tenbo (A Survey of Macroeconometric Models of Japan),"Paper presented at the annual meeting of the Japan Associationof Economics and Econometrics, September 23, 1985.
[25] M. Saito and T. Ohno, "An Energy Mo.del of the Japanese Eco-100 • MITSUOEZAKI
nomy, 1961-1979," in Research on Socio-Economic Aspects
of Energy System, (Reports of Special Project Research on
Energy under Grant-in-Aid of Scientific Research of the Ministry of Education, Science and Culture, Japan), January
1984, pp. 45-54.

[26]W. C. Sanderson and J. G. Williamson, "Adjusting to External Shocks in Developing Countries: A Review of Some WorldBank Macro Models," Discussion Paper No. 1039, Harvard
Institute for Economic Research, Harvard University, Cambridge, Mass., February 1984.

[27]Y. Shinkai, "Dainiji Sekiyu Kiki no Keizaiteki Kiketu(Economic Consequences of the Second Oil Crisis)," Kihan
Gendai Kei2ai (Contemporary Economics), 41, Winter 1980, pp.

27-40.
[28]J. B. Shoven and J. Whalley, "Applied General-Equilibrium Models of Taxation and International Trade: An Introduction and Survery," Joumal of Economic Literature, Vol.
XXII, September 1984, pp. 1007-1051.

[29]K. Tsujimura and M. Kuroda, Nihon Keizai no lppan Kinleo
Bunselei (A General Equilibrium Analysis of the Japanese
Econorny), Tokyo: Chikuma-shobo, 1973.

[30]United Nations, A Sorstem of National Accounts, New York,1968 (ST/STAT/SER, F/2/Rev. 3).

KOBE ECONOMIC & BUSINESS REVIEWCONTENTS
NO. 23 (1977)
Alternative Approaches to the
Accounting for Education..................................Nobuko Nosse

Personnel Management of Japanese Companies
in Thailand: A Field Paper............................ Hidehi Yoshihara

Evaluation of Performance Using
Multiple Criteria......................................... Kornayuhi Itow

Some Bargaining Process Models in 'the Shipping Exchange...................................Tetsuji Shimojo
Asset Diversification under the FIexible
Exchange Rate System...................................Kazuhiro Igawa
NO. 24 (1978)

The Demand for International
Currencies and Reserves..................................Masahiro Fwfita

Nobuo Miyata
Studies for the Prediction of Shipping Markets-A Survey and their Applications-.....................Tetsuji Shimojo

A Note on the International Transmission of
Policy Effects under Flexible Exchange Rates...........Kazuhiro Igawa

A Control Estimation Approach toTime-varying Parameter Models........................... Yuhio Uchida
NO. 25 (1979)

Redundancy of Seafarers and the Practiceof Permanent Employment.........................Hiromasa Yamarnoto
Japanese Multinational Enterprises:
A View from Outside.................................. Hidelei Yoshihara
A Comment on the Bayaraa's Algorithm............................ Korrtayuhi Itow
Effects of Ship's Size and Cargo Lotson the Ocean Freight Rates..............................TetsuJ'i Shirnojo
Direct Foreign Investments and Foreign Exchange Rate:
A Model of Specific Factors and Non-tradable Goods. . . Kazuhiro Igawa
NO. 26 (1980)
Economic Policies under the Flexible Exchange

Rate System: a Stock Approach and a Long-run
Government Budget Constraint...........................Kazuhiro Igawa
Estructura de les ventaJas comparativasy
politica cornercial-El caso de las exportaciones deproductos industriales el Brasil..........................ShoJ'i Nishijirna

Technological Progress and Capital Accumulation............... Kazuo Shirnornura
NO. 27 (1981)
Accounting Systems of Non-Market Oriented Activities............... Nobuleo Nosse

Current Situations of World Economy andGlobal Adjustment of Industries.......................... Hihoji Katano
Current Cost Accounting and the Conceptof Specific Purchasing Power Capital....................... Isao Naleano
An Input-Output Table for Evaluation of the
Shipping Activities.......................................TetsuJ'i Shirnojo

The Function of Modern Corporate Financial Reportingin a Mass Democratic Society.........................Hidetoshi Yantoji
NO. 28 (1982)

The Internationalization of Japanese Commercial Banking-Experiences in the 70's-...............................Masahiro FuJ'ita

Kenichi Ishigalei
A Synthesis of Simultaneous Equations Estimators ..............Hiroshi Sadamichi
A Database System of Economic Time Series....................Hiroshi Sadarnichi

Yasuo Nunohami
NO. 29 (1983)
An Interpretation of Conventional Accounting
Income Information ......................................... Isao Naleano
A Production System for Transport Services........................TetsuJ'i Shimojo
Some Evidences between Foreign Direct Investments

and Foreign Exchange Rates:
A Preliminary Note .....................................Kazuhiro Igawa

Two Types of Railroad Regulation by States .
in the 19th Century of the U.S.

-Search for the Social Foundation of Modern
Corporate Financial Reporting=......................Hidetoshi Yamoji
NO. 30 (1984)
National Monetary Policy in an International
Capital Market..............................................Jtirg Niehans

Craft Unions, Wages and Employment.............................Murray C. Kernp
On the Applicability and Implementability ofthe (Finite) Compensation Principle....................Marray C. Kernp
Internationalization of Japanese Commercial Banking-The Recent Experience of City Banks-................Mascthiro Fwfita

Kazuya Mizushima
Ryoichi Mileitani
Efficiency of the Least Squares Estimators in

Linear Models with Idempotent CovarianceMatrix of the Error Terms............................ Hiroshi Sadantichi
Diversification of Large Japanese
Manufacturing Firms................................... Hidelei Yoshihara
Indexing Policies and Macroeconomic Stability in
Brasil: Rational Expectation Model......................ShoJ'i Nishijirna

A Simple General Equilibrium Model Involving
a Maximizing Labour Union.......................... Kazuo Shirnomara
NO. 31 (1985)

Toward the Nagative Picture Theory of Commercial
Double-entry Bookkeeping and Financial Accounting.......Jsao Nahano
Stability of the Demand for Money: Australian Experiences........Kenichi Ishigahi"Empirical Study of Changes in Accounting Policy" in the Case ofJapanese Enterprises...................................Hidetoshi Yamoji
An Empirical Study on International Short-Term Capital
Movements in Japan ..........."............................Hidelei Izawa

KOBE UNIVERSITY ECONOMIC REVIEW 31, 1985
Edited by Faculty of Ecomomics,
Kobe University, Kobe, JapanCONTENTS
A Measurement of the Rate of Surplus Value in Japan;
The 1980 Case ............................"........................................Nobuo Ohishio

Taheshi NahataniInterrelationships between Population and Economic
Growth .........................."..".."...,..-.............-•..•••••••••••• Mitoshi Yamaguchi

Static Macroeconomics from the Neoclassical Viewpoint...............Toshitaha Fuleiharu

Money Finance, Bond Finance and "Yucho (Postal
Savings) Finance".....•••.."..........".."................................ Yoshio Taleigatva
A Critical Note on "Dollar Standard" ..."..".."....................................Seiichi FuJ'ita'hetttlteln"llletlllel"1"IIetlt,bntntlmtlelnlnttetllelMItttlmlltetllllet)el-tettetllelttel"ltellnllptttl"Il""flletetnll""tutttlhtmttele"tllls"tlltlP-

THE ANNALS OF THE SCHOOL OF
BUSINESS ADMINISTRATIONKOBE UNIVERSITY No. 30, 1986
Edited by the School of Business Administration,

Kobe University, Kobe, JapanCONTENTS
Sozial 6konomische Probleme und Erfahrungen beim
Einsatz von Industrierobotern (IR) in der DDR...............Eleleehard Sachse
Handlungskompotenz als Komponente der Arbeitsverl5ssigkeit ..............Helmut Kulha

Externe Rechnungslegung der japanischen
Aktiengesellschaften .................."...,..............................Masatoshi Kuroda

Microeconomic Problems of Rationalization .................................Mareell Schweitzer
Production, Investment and Production Technique...............................Htsao Hisarrtoto

Manager's Environment Cognition and Organizational
Design: A Simple Contigency Model ................................... Hideo Suehiro'illltlltttMltlmltllTl"ITItttsll,lnllllemeltlllllltltlttllllMl"ltllllltlllTlltslltllllU"eeellpt11Tlleeeet"lll}klelettrt"nl"eeJd"tllnkelell""Inllmt)""lb,•

KOBE UNIVERSITY LAW REVIEWInternational Edition No. 19, 1985
Edited by Faculty of Law
Kobe University, Kobe, JapanCONTENTS
Canada: Recent Developments in the Private International

Law Rules Dealing with Matrimonial Property.............. J.-G

CastelJapan's Middle East Policy: Impact of the Oil Crisis.................. Shu-zo-

KimuraThe Business Groups and the Distribution System,and the Antimonopoly Law in Japan (2)....................Aleira

NegishiRESEARCH INSTITUTE FOR ECONOMICS AND
BUSINESS ADMINISTRATION,KOBE UNIVERSITYHISTORICAL SKETCH
In 1919, a research organization named the Institute for Commerce was founded in
Kobe Higher Commercial School, one of the chief predecessors of Kobe University,with a gift made by F. Kanematsu & Company,a leading mercantile firm in Kobe. The
organizasion was designed to carry on and facilitate integrated research on businessand comrnerce and to formulate and publish the results of these studies andinvestigations in such form as to rnake them available to the business community.

With the founding of Kobe University of Commerce, successor of Kobe Higher
Commercial School, in 1929, the Institute extended its research activities by adding

several divisions. One was the famous Latin-American Library, which soon became
the center of research in this field in Japan. A room for statistics equipped withvarious computing machines was established and began publication of Jdy5 Keizai
Troleei and Seleai B6elei To-leei annually. A filing room was prepared to deposit press

clipping files systematically arranged by topics and dates. Another room wasdesigned to become the center of all possible original records and data having to dowith the beginning and progress of Japanese business.

On the campus of Kobe University of Commerce, another organization named theInstitute for Business Mechanization was founded in 1941 utilizing businessmachines donated by the IBM Corporation and others. With Professor Yasutaro Hirai
as its head a broad and forward-looking plan for business mechanization in Japan wasdeveloped.

In 1944, Kobe University of Commerce changed its name to Kobe University of
Economics. After the War, however, the University was consolidated with three othercolleges in Hyogo Prefecture to become Kobe University. With this development, thetwo Institutes were also amalgamated into the Research Institute for Economics andBusiness Administration, Kobe University. At present, the Institute, with its eighteen

full-time professional staff members, carries on studies and investigations ininternational economics, international environment, comparative economies,
international business and management information systems.

ORGANIZATIONThe Institute consists of five sections. Each section and its research subjects are as
follows:

1• International EcQnomic Studies

International Economics, International Monetary Economics,
Maritime Economics, International Labor Relations
2. International Environmental Studies

Resource Development, International Organizations,International Industrial Adjustment

3. Comparatiye Econornic Studies
Pacific Basin I (Oceanian Economy),
Pacific Basin II (North and South American Economics)
4. International Business Studies

Comparative Business, Multinational Enterprise,International Business Finance

5. Msnagement Infermation Systems
Business and Accounting Information, Information Processing System,
International Comparative Statistics
In addition to the ordinary work of each section, several research committees,
whose members are not limited to the Institute staffs, are regularily held to carry on

joint studies. At present, there are ten standing research committees, as follows:

Experts Group on the World Trade Structure, Committee of International Finance,

Committee of Maritime Economics, Committee of Labor Market, Committee ofInternational Studies on Economic and Industrial Structure, Committee ofInternational Comparative Economics, Committee of International Business
Behavior, Committee of International Business Finance, Committee of Management
and Accounting Information Systems, and Committee of International Comparative
Statistics.

For conveninece and greater efficiency in carrying out its research activities, theInstitute has a general office which is responsible for 1) the collection andpreservation of a comprehensive collection of books, periodicals, pamphlets, andoriginal records and data of finance, trade, commerce, industry and businessgenerally; 2) the classification, cataloguing, indexing arranging, annotation andcompilation of these research materials; and 3) the formulation and publication of theresults of the investigations and studies accomplished by the professional staff
members of the Institute.

As an affiliated institute, the Documentation Center for Business Analysis has
been established in 1964. It is the first systematic information facilities in the field of

business administration in Japan that has been recognized and authorized by the
Ministry of Education.The purpose is to collect and to make intensive control of all
kinds of materials on business administration and to make them available to scholars,

universities, governments, and business •world with the aid of modern documentation
techniques.

RESEARCH INSTITUTE FORECONOMICS & BUSINESSADMINISTRATIONKOBE UNIVERSITY
Director: Hiromasa YAMAMOTo
Secretary: Takeo KISHIDAINTERNATIONAL ECONOMIC STUDIESInternational Economics Prof. Hikoji KATANo
Assoc. Prof. Kazuhiro IGAwA

International Monetary Economics Prof. Masahiro FuJITA

Maritime Economics Prof. Hiromasa YAMAMoTO

International Labor Relations Prof. Hiromasa YAMAMoTo
Assoc. Prof. Kazuo SHIMOMURA

Prof. Nobuo OKISHIOINTERNATIONAL ENVIRONMENTAL STUDIES
Resource Development
International Organizations

InternatiQnal Industrial Adjustment

Prof. Hiroshi SADAMICHIProf. Masahiro FuJITA
Assistant Hideki IZAWA
Prof. Hiroshi SADAMICHIProf. Akira NEGISHICOMPARATIVE ECONOMIC STUDIES
Pacific Basin I(Oceanian Economy)
Pacific Basin II(North and South Arnerican Economics)

Prof. Yoshiaki NISHIMUKAIAssoc. Prof. Kenichi IsHIGAKI
Prof. Yoshiaki NISHIMUKAIAssoc. Prof. Shoji NISHIJIMAINTERNATIONAL BUSINESS STUDIES
Comparative Business
Multinational EnterpriseInternational Business FinanceProf. Tadakatsu INouE
Assoc. Prof. Kenji KoJIMA
Prof. Hideki YosHIHARA
Prof. Isao NAKANOAssoc. Prof. Hidetoshi YAMAJI

Prof. Akio MoRI

MANAGEMENT INFORMATION SYSTEMSBusiness and Accounting Information
Information Processing System
International Comparative Statistics

Prof. Isao NAKANO
Prof. Isao NAKANOAssoc. Prof. Komayuki ITow
Prof. Nobuko NossE
Assoc. Prof. Yasuo KoNISHi

Office: The Kanematsu Memorial

KOBE VNrvERSITYROKKO, KOBE, JAPANHall