学術論文 Masumi Kawade Site

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Discussion Paper No. 92

A Prototype of Macro-econometric Models

For Analyzing Asian Crises

by

Kanemi BAN, Economic Planning Agency and Osaka University Kiyomi WATANABE, Economic Planning Agency

Mantaro MATSUYA, Economic Planning Agency Yasuko IKEMOTO, Economic Planning Agency Masakatsu NAKAMURA, Economic Planning Agency Takeshi IHARA, Economic Planning Agency

Masumi KAWADE, Economic Planning Agency and Tokyo University Tomonari TAKEDA, Economic Planning Agency and Tsukuba University

March 2000

Economic Research Institute Economic Planning Agency Tokyo, Japan

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The views expressed here are the author’s and do not represent those of the Economic Planning Agency.

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1. Introduction

During the 1980’s, East Asian countries recorded surprising economic growth attributed to investment in export-oriented industries and promotion of industrialization. High domestic saving rates and Foreign Direct Investments (FDI) supported their investments. Led by high exports and investments, these countries achieved real growth rates around 10% by 1995. Though current accounts were running deficits, low inflation and balanced budgets created an image and subsequent expectations of “Growth Center of the World”.

By pegging exchange rates and keeping interest rates higher than developed countries, foreign money flooded into Asia with the liberalization of financial systems. This was especially evident in 1994, after the currency crisis in Mexico, when capital inflow increased rapidly.

However, in 1996, considerations were made in Thailand to cut down its currency because export growth, a leading component of GDP, had slowed down. In spite of an effort to sustain speculation of the baht, Thailand moved to float after the currency attack in May 1997. As a result, amounts of capital outflow, combined with a weak financial sector, paralyzed Thailand economy. GDP continued to decline in 1997 and 1998. At this point, the currency crisis had spread to Malaysia, Indonesia, and Korea.

Notwithstanding, the Japan economy, too, has fallen victim to this Asian crisis. Immediately after the baht started to float, concerns surrounding the strength of the Japanese financial sector began heightening in overseas markets. Fears of such instabilities became an obstacle for Japanese financial institutions trying to raise funds in foreign currency. The Japan premium, that is, the interest rate premium Japanese financial institutions pay over interest rates for raising funds in U.S. dollars, started to increase in October and rise sharply in November 1997. As a result of the difficulty in financing in overseas markets, large Japanese banks and securities firms such as Hokkaido Takushoku Bank and Yamaichi Securities went bankrupt.

We can consider this financial crisis to have been caused by anxiety about expansion of foreign debts, inflation, and the collapse of asset prices under currency depreciation. Asian countries and their closely interdependent economies in terms of both trade and FDI, brought about such a chain reaction that worries involving expectations of economic growth for one country led other countries to stagnation.

There have been many simulation experiments for Asian crises. Some of them gave us valuable insights, while others failed to explain the observed phenomena. It is well known that a traditional backward-looking model is not useful for analyzing the causes and impacts of financial crises. We need a forward-looking model for accuracy purposes. Unfortunately, there are few macro-econometric models used in Japan, in which forward-looking expectation mechanisms are introduced explicitly. In this paper, we present a small forward-looking model for Japan, Thailand

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and Korea, which proves to be significant for explaining Asian crises. Some simulation experiments were undertaken to think about Asian crises.

2. HistoricaI Perspective

In the early 1990’s, the Asian countries achieved high GDP growth rates, due to vigorous investment based on a high domestic savings ratio and foreign capital inflow, and a sharp increase in exports. The economic fundamentals in these countries, such as balanced government finances and low inflation rates, remained intact. Even under these conditions, the Asian economies suffered large devaluations in their exchange rates and considerable recessions from the currency and financial crises in 1997.

The capital outflow from the Asian countries directly damaged private investment in the region. The fear of future recession affected both the household and business sectors. The household sector expected a reduction of household income and asset value in the future, and the business sector anticipated a decrease in their corporate values. These expectations brought about a reduction in domestic investment and consumption.

Figure 1. Foreign Exchange Rate Indexes from 1996Q1 to 1999Q2

Figure 1 illustrates the foreign exchange rate index (1996Q1 = 100) of Thailand, Korea, and Japan. The collapse of the Thai baht in July marked the beginning of the Asian financial crisis. The Japanese yen and the Korean won depreciated by 10 percent in 1996. During that period, the Thai baht was fixed to the US dollar. As a result, the real exchange rate of the baht appreciated relative to the yen and the

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5.9% in 1996, because of fallen exports feeling the effects of the real appreciation of the baht. Subsequently, the serious economic recession, caused by the crisis, happened in 1997.

Figure 2 shows Thailand’s GDP which decreased sharply following the 1997 crisis. In particular, investment declined by more than 30 percent in 1997. Private consumption also declined by more than 10 percent. A slump in domestic demand continued.

Figure 2. Domestic Demand: Thailand

The sharp reduction of private investment in Thailand was caused by several factors. At first, the capital outflow brought about a direct reduction of domestic investment stemming from financing difficulties. Secondly, domestic investors became increasingly cautious to invest with the depreciated corporate values reflecting the rapid increase of foreign debt in local currency tied to the devaluation of the baht. Thirdly the inflationary impact and rising interest rate, which accompanied the devaluation of the baht, depreciated household asset values, thus translating into higher risk for investors. The implied fear of even greater risk in the future, in addition to the inflationary impact and rising interest rate, continued to restrain to investment. Concerning private consumption, the fear of inflation reduced household disposable income and a rising interest rate depreciated household asset values. Consumer demand was depressed by the depreciation of income and asset values.

Figure 3 illustrates the stock market index in Thailand, Korea and Japan. According to the figure, the stock price in Thailand had declined by 40 percent in early 1996. This meant that the deterioration in the economic conditions was expected by the market and subsequently corrected in the stock market before the crisis. Both in Japan and Korea, the stock market price indexes had also declined since early 1996. The stock market and the currency market had been under pressure as contagion raged and foreign capital fled.

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Figure 3. Stock Market Index in Thailand, Korea, and Japan

Figure 4 illustrates the impact of currency depreciation on trade in Thailand. The baht appreciated by more than 40 percent in 1997. During the same period, the current account ran a surplus. This surplus was mainly due to the decline in imports. On the other hand, exports increased for a while, but declined thereafter.

Figure 4. Exports, Imports, and the Foreign Exchange Rate: Thailand

Figure 5 illustrates how the currency depreciation disturbed the relative price in Thailand. Fortunately, the adjustment in relative prices was nearly completed by early 1999.

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Figure 5. Consumer Price, Export and Import Prices: Thailand

The Korean economy appeared to show good fundamentals until 1996. In November 1997, the Korean financial system experienced a serious shock because of speculation attack, which had spread from the crisis in Thailand. Then, foreign investors refused to allow private banks in Korea to roll over their deficits. Ever since the speculation attack, the Korean financial system has been unstable. The instability of the financial system has been perhaps more severe due to the stance of many Japanese banks attitude. These banks immediately withdrew their capital, mainly short-term capital, from Korean financial markets because Japan’s own financial crisis had become deep.

However, it can be pointed out that with the yen continuously depreciating since 1995, Korea had lost its competitiveness in the world market. The seven conglomerates had already gone bankrupt before the currency crisis, which started in November 1997. Others suffered from low profitability. In the stock market, it was expected that the deteriorated fundamentals in business firms would have an inverse effect on stock prices.

GDP in Korea increased 6.8% in 1996 and 5.0% in 1997, but decreased 5.8% in 1998. Similarly, private consumption increased 3.5% in 1997 but decreased 9.8% in 1998. Investment decreased 2.2% in 1997 and in 1998 decreased sharply by 21.1%. The weak consumption and investment indicated above may be explained by the mechanism similar to that of Thailand. In particular, the capital outflow effect caused a sharp drop in investment similar to the situation in Thailand. However, GDP, private consumption, and investment in Korea continued to decline after the crisis, while exports increased. Net exports in Korea increased by 5.7% in 1997 and 12.2% in 1998.

Figure 7 illustrates the adjustment process of the relative prices. The adjustment was almost complet by early 1999 in Korea. Figure 8 shows that the improvement in the current account is mainly due to a decline in imports.

Figure 9 illustrates the decline of domestic demand in Japan in the second quarter of 1997 because

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of the increase in the consumption tax rate. The decline in the second quarter had been anticipated. Consumption showed a slight recovery in the third quarter, but the currency crisis in Thailand damaged the Japanese economy severely. As the dominant market for the Japanese economy, the East Asian economies clearly had a strong impact on Japan’s economic well-being, primarily in the form of declining exports to Asia. Also, East Asia had become the cost effective production bases for many of Japan’s manufacturing industries. Immediately after the crisis in July 1997, many of these manufacturing firms decided to close their plants located in Asian countries. On the other hand, it was well known that Japanese banks had been engaged in considerable lending activity in Asian countries. Thus, it was not surprising that the Asian crisis depressed the Japanese economy severely. In September, Toshoku, a large food company, went bankrupt. The failure of Sanyo Securities, Yamaichi Securities, and Hokkaido Takushoku Bank severely damaged financial stability. Since the collapse of the bubble in the early 1990s, the failure of Japanese financial institutions has incurred exacerbated suspicions, both in the domestic and the foreign markets. As a result, the Japanese suffered from a rise in the Japan premium. Japanese markets clearly experienced a credit crunch. The stock market also declined as illustrated in Figure 2. This financial difficulty in turn cut into corporate investment. The deteriorated Japanese economy reduced imports from Asian countries, which in turn damaged the Asian economies. According to Figure 11, imports started to decrease immediately following the outbreak of the Asian crisis.

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Figure 6. Domestic Demand: Korea

Figure 7. Consumer Price, Export and Import Prices: Korea

Figure 8. Exports, Imports and the Foreign Exchange Rate: Korea

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Figure 9. Domestic Demand: Japan

Figure 10. Consumer Price, Export and Import Prices: Japan

Figure 11. Foreign Exchange rate, Export and Import Prices: Japan

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3. The Basic Model

In this paper, we developed a small econometric model for an open economy with forward-looking expectations. The basic structure of the model is based on the Mark III version of MULTIMOD developed by the IMF (Laxton et.al. (1998)). The Mark III model is a dynamic multi-country model of the world economy that can be used to study the transmission mechanisms of shocks across countries as well as the consequences of alternative monetary and fiscal policies. The structural equations are based on modern macroeconomic theory. The Mark III model assumes that behavior is completely forward-looking in the goods and asset markets. Well-defined steady-state models construct terminal conditions for the dynamic models, thus revealing the long-run effects of shocks. The model is solved using state-of-the-art simulation algorithms. Unfortunately we do not use steady-state formulas in this model.

Nevertheless, we choose to follow the basic structure of MULTIMOD since the model assumes the economic agents behave in a forward-looking manner, an assumption consistent with rational expectations. As Barrell et. al (1998) pointed out, the crises in Asia were associated with a fear of significant losses by the US, the EU and Japanese financial institutions, which led to a major reversal of capital flows. This fear has potentially damaged the balance sheets of many foreign financial institutions. Faced with fallen asset prices, foreign financial institutions have been forced to reconsider the risk and size of their loan portfolios. Since the source of capital flight was short- term debt to banks in Asian countries, the interest rate on foreign debt has risen with a much higher risk premium than before in both the Japanese and the emerging markets. On the other hand, Barnanke and Gertler (1989) pointed out that the condition of the borrower’s balance sheet during the crisis was also a source of output dynamics. According to their conclusion, lower borrower net worth increases the agency costs of financing real capital investment. That is, if business fluctuations follow a downward trend, then shocks affect net worth as a debt deflator, and thus reduce real investment. Krugman (1999) emphasized the following two factors: 1) the role of business firms’ balance sheets in determining their ability to invest, and 2) the effect of capital flows on the real exchange rate.

In order to take these factors into account, we need to incorporate a forward-looking mechanism into the macro-econometric models explicitly. If not, as Fair (1999) illustrated, macro-econometric models tend to overestimate the expansionary effects of currency depreciation, even in the case when depreciation leads to capital losses in local currency causing negative effects on consumption and investment. This implies that macro-econometric models fail to simulate the Asian crisis since Asian countries have been severely depressed by currency depreciations. In Fair’s model, consumption depends on current income, the interest rate and wealth, where wealth corresponds to a country’s net assets. On the other hand, investment depends on current output and the interest rate.

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Monetary policy has a direct effect on consumption and investment through the interest rate assumed by the model. According to simulations, currency depreciation expands net exports and, in general, has an expansionary impact on the domestic economy, unless monetary and fiscal policies create a negative impact. If wealth is negative, that is, the country is a net borrower, then currency depreciation may have a negative impact on wealth. Unfortunately, Fair’s and other macro-econometric models have failed to simulate the shocks in Asia. That is, currency depreciation has depressed the economy, where investment has shrunk more severely than consumption or government spending. Investment strongly depends on expectations for the future and financial resources. For this reason, we need another type of macro-econometric model for analyzing the Asian crisis.

Consumption Behavior

MULTlMOD Mark III assumes that households maximize their expected utility over a lifetime subject to a budget constraint. The Maximization problem becomes:











  Ω



 





∑

⁻ +

=

0 1

0

) 1 (

1

t T t

C t ^u^C

maxE

t _δ

Subject to

t t t

t w

t ^t ^Y ^C ^r ^W

W ₊₁ =(1− ) − +(1+ )

where C_t is consumption expenditure, Y_t is labor income, W_t is financial wealth, _δ is the discount rate, and r is the rate of return. In the case where r_t is a constant and equal to δ, and T goes to infinity, the optimal path C_t is constant over the planning horizon, and C₀ is given by

) (

) 1 1 (

1 1

1

0 0 0

0 0

0 ^E ^t ^Y ^W ^H ^W

C _w _t

t

+

=













 _^+









  − Ω



 





 +



 





= +

∞ −

∑

= _δ ^φ

δ

In this model, the consumption function is formulated as:



 +

=



 



 + + +

= ₊

t t t t

t t

t w t

PC H W C

PC H t Y H

φ

δ ¹

1 ) 1

1 (

where H_t is real human wealth.

In the MULTIMOD Mark III, financial wealth, W_t is defined as the sum of domestic equity, bond holding and net foreign assets. Whether bond holding should be considered a financial asset is controversial. From the Ricardian perspective, changes in government debt should have no real

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effects on economic activity. According to this view, forward-looking rational households would revise intertemporal consumption and saving decisions to offset the implications of government deficits. However, the MULTIMOD Mark III doubts the validity of the Ricardian equivalence, and thus includes government bonds as financial wealth explicitly. This issue is now an ongoing debate. According to the recent experiences in Japan, where the value of total government bonds is greater than GDP, the large share of government bonds does not improve household consumption behavior, but restrains it by the expected future increase in tax burdens. Similarly, in other Asian countries, we do not observe that the increase in government bond holding has had a positive impact on household consumption.

In the MULTIMOD Mark III, net foreign assets are included in financial assets. However, we assume that the value of net foreign assets is first reflected in the valuation of business firms. In our model, net interest received from foreign assets or liabilities is included in corporate income. It is said that the deterioration of firms’ balance sheets by the explosion in the domestic currency value of dollar debt has had huge depressive impacts on financial institutions and business firms in Asian countries. Consequently, we assume that the deflationary impact of currency depreciation is captured through the declined market value of financial institutions and business firms.

Investment Behavior

The model of investment and capital formation in the MULTIMOD Mark III is based on the q theory of Tobin (1969). Business firms are assumed to maximize the expected present value of future after-tax net earnings subject to technological constraints:











 _^ _^ − − − Ω

∑

^∞ +

=

0 c

0

) )

, , ( )( t 1 1 (

1

t t t t t t t t t

t t

I _r ^p ^F^K ^L ^I ^w ^L ^q ^I

maxE

t

Subject to K_t₊₁=I_t +(1−δ)K_t

where K_t is capital stock, L_t is labor, I_t is gross investment, p_t is output price, wt is the wage rate, r_t is the market interest rate, q_t is the price of investment goods, and t_c is the corporate income tax rate. Including I_t in the production function, F, implies that the adjustment cost (where F_I ≤0andF_II ≤0) is assumed. By solving the maximizing problem, we get the optimal investment rule, where the investment ratio is a function of Tobin’s marginal q. Hayashi (1991) showed that Tobin’s marginal q is equal to Tobin’s average q in appropriate conditions. Tobin’s average q is observable, and the optimal investment rule is formulated as fo11ows:

δ

+

 

 −

Φ

= 1

t t

t

K q

V K

I

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where V_t is the market value of business firms. In our model, investment behavior consists of the following equations:

δ

+

 

 ₋

=



 + +

−

=

−

=

+

=

+

1 1 ) 1

1

( ₁

t t

t

t t t

c t

t t t

t t

t

K q b V K

I

r V YC

t V

YW DEP TI

GNP YC

NETF GDP

GNP

where GNP_t is gross national product, GDP_t is gross domestic product, NETF_t is net factor income from abroad, TI_t is indirect tax, DEP_t is depreciation, YW_t is labor income, YC_t is corporate income, and V_t is the market value of business firms. Assuming that the stock market is efficient, V_t is equal to the total value of stocks in individual business firms. In our model, we estimate V_t by the above forward-looking equation. Net factor income, NETF_t , is included in the corporate income of business firms, YC_t. This implies that net foreign assets or liabilities are held exclusively by business firms. Therefore, the financial assets held by households W_t is assumed to be incorporated into the market value of business firms, V_t.

In our model, we introduce the risk factor as follows:

1 1

) 1 1

( ₊



 + + +

−

= t

t t

c

t ^V

YC r t

V σ

where _σ is a risk premium. If _σ increases, then the market value, V_t, will decline. This results in a reduction of the investment ratio.

Here, we also consider the availability of financial resources. It is well known that foreign capital, provided as foreign direct investment, and other capital movement have played an important role in financing domestic investment in Asian countries. Finally, the investment function in each country except Japan is formulated as:

,

1 _t _t

t t

t

t ^K ^dFIN

K q b V

I +





+

−

= δ

where FIN_t is financial availability.

The impact of currency depreciation on domestic investment is seen as V_t, _σ and FINt combined.

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Trade and the Current Account

International trade is also important to our model. In our model, exports of goods and services on a balance of payment basis are formulated as a function of world imports in real terms, as the ratio of export price to world import prices. Export price depends on domestic price in the local currency and the foreign exchange rate, whereas imports of goods and services on a balance of payment basis are formulated as a function of real domestic demand and the ratio of import price to domestic price. Thus, we convert exports and imports of goods and services on a balance of payment basis to a national account basis.

The current account is defined by net income receipts and current transfers in addition to the trade balance of goods and services. Net income receipts depend on the accumulated current account in terms of the US dollar. Current transfers are exogenous in the model. The current account measures the flow of trade and transfer, and also measures the international financing requirement for the economy. When domestic investment exceeds national savings, the economy is running a current account deficit and accumulating net liabilities on future domestic output. In the model, we suppose that the changes in official foreign reserves are zero in general. As a result, the sum of the current account and the capital account is zero. So, if foreign countries are not willing to lend funds to a country to finance trade deficit, then the domestic firms have to borrow the funds from the countries’ foreign reserves. In this meaning, the official foreign reserves held by a country represent the financial difficulties of that country.

Domestic Money Market

The domestic money market is very simple in this model. The main equation is based on the following money demand:

) ,

( _t _t

t

t _L_GDP _r

P M =

The money supply, M_t, is under the control of the central bank, and money is held by households and business firms for transaction and speculative purposes, which determines the equilibrium in the money market. The equation used to represent the money market in its reduced form is as follows:





= _t

t t

t ^rofficial

GDP P

KBPC GDP

P f M

rlong , ,

where rlong_t is the long-term bond yield or the long-term lending rate, rofficial_t is the official discount rate, and KBPC_t is the accumulated current account.

The equations of each country are shown in the Appendix. Some parameters in the equations are

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estimated, and the others are assumed. Expected variables such as human wealth and the value of business firms are estimated by the steady-state assumption on future variables used in the definitions.

Model Estimation

We estimated three country models to represent Japan, Thailand, and Korea. The entire model and its variables are shown in the Appendix. Parameters are mainly estimated using the observed data during the period from the mid 1980s through the late 1990s, while a few of the other parameters are assumed. Human wealth in the consumption function and the market value of business firms are estimated under steady-state assumptions. That is,

t t t

c t

t t w t

r YC r

t V

PC t Y H

+ +

− +

=

− +

=

σ σ

δ δ ) 1

1 (

) 1 1 (

where the risk factor σ is assumed to be 0 for estimation purposes.

Structure of the Model

Equations and variables are listed in the appendix. The basic structure of the model is illustrated as follows:

Figure 12. Structure of the Model

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4. Preliminary Simulations

In this section, we undertake some simulations to examine the Asian crises. Specifically, we run experiments of exogenous currency depreciation, an exogenous fall in world import and an exogenous hike in risk premium for Japan, Thailand, and Korea. Additionally, an experiment of an exogenous reduction in financial availabilities from abroad is run for Thailand and Korea. Each simulation is performed under the assumptions of a fixed exchange rate and rational expectations. We solve the forward-looking expectation model by using the Fair and Taylor method (Fair and Taylor (1983)).

Effects of Exogenous Currency depreciation

In this experiment, the local currency in each country is depreciated by 50 percent against the US dollar. Since capital movement is exogenous, the trigger from a change in expectations of future interest rates is limited.

The currency is assumed to be depreciated at period zero, and to continue at this same level thereafter in the experiment. Figures 13 and 14 illustrate the impacts of currency depreciation on real GDP in the anticipated case and unanticipated case, respectively. Selected other results are compiled in Tables 1 and 2. The values found in the above referenced figures and tables correspond to the percentage difference between the predicted value and the base value except for the Current Account-GDP ratio, which is the difference between them.

In the case of both the anticipated and the unanticipated experiments, currency depreciation has an expansionary effect on GDP. These results are usually observed in the simulation experiments by macro-econometric models, such as Levin et.al. (1997), Fair (1999) and others. If a model fails to involve the effects of capital losses caused by depreciation, it is true that macro-econometric models tends to overestimate the effect. However, the market value of business firms plays an important role in investment behavior in our model. Currency depreciation deteriorates the value of foreign liabilities evaluated in local currency. This implies that the payment amount in local currency for liabilities will increase both in the current and future periods, which results in the decline in the market value of business firms. This decline in market value has a negative impact on business investment. On the other hand, the currency depreciation improves the current account. If the amount of improvement in the current account is larger than that of the increase in the payment for liabilities, the market value of business firms will improve.

According to our simulation experiment, the market value of firms improves in each country. If the depreciation is expected in advance, the improvement in the market value has an expansionary

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effect on investment before the depreciation actually occurs, while the impact of unanticipated currency depreciation depends on each country. In the case of Thailand, currency depreciation deteriorates the investment behavior after its depreciation both in the anticipated and the unanticipated case, while it takes relatively more time to deteriorate the investment behavior both in Japan and Korea.

Figure 13. Impact of Currency Depreciation on GDP (anticipated case)

Figure 14. Impact of Currency Depreciation on GDP (unanticipated case)

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Table 1. Impact of Currency Depreciation (anticipated case)

Consumption Investment

Japan Thailand Korea Japan Thailand Korea

-3 -0.17 5.25 4.96 3.91 4.35 12.26

-2 0.40 5.68 6.94 4.20 5.26 18.39

-1 0.37 6.21 10.57 4.55 6.29 9.50

0 0.26 7.34 -4.93 2.16 -4.09 -0.15

1 0.35 7.19 -5.84 1.39 -4.77 -3.20

2 0.26 6.13 -5.29 0.81 -5.84 -3.10

3 0.15 5.10 -5.32 0.15 -6.95 -6.22

4 0.04 3.97 -7.30 -0.62 -8.19 -6.28

Consumer Price Current Account/GDP Japan Thailand Korea Japan Thailand Korea

-3 0.52 0.91 5.35 -0.07 -2.05 -2.19

-2 0.76 1.02 7.37 -0.14 -2.24 -3.28

-1 0.74 1.12 5.97 -0.16 -2.52 -3.19

0 0.89 15.04 23.00 -1.26 9.37 0.67

1 2.40 17.07 36.08 0.42 12.09 8.82

2 2.11 16.49 35.54 0.32 12.01 8.17

3 1.88 16.46 34.64 0.31 12.61 8.63

4 1.63 16.29 33.95 0.30 13.13 9.20

The impact on consumption behavior also depends on each country. In Thailand, currency depreciation improves consumption, while we observe a deteriorating effect in Korea. This is mainly due to the difference in magnitude of its impact on the consumption deflator. The path through ratio of currency depreciation in Korea is 80 percent, while that of Thailand is almost 32 percent.

Table 2. Impact of Currency Depreciation (unanticipated case)

Japan Thailand Korea Japan Thailand Korea

0 -0.30 6.70 -11.08 2.29 -5.84 1.35

1 0.58 7.24 -4.35 1.59 -6.55 3.08

2 0.52 6.25 -0.24 1.06 -7.62 0.36

3 0.42 5.28 -1.80 0.42 -8.73 -0.21

4 0.32 4.22 -2.72 -0.34 -9.97 -5.40

0 0.93 15.29 22.46 -1.17 10.14 2.27

1 2.78 17.07 40.60 0.42 12.25 7.61

2 2.49 16.55 40.47 0.30 12.23 6.37

3 2.26 16.52 39.40 0.29 12.80 6.77

4 2.00 16.36 37.16 0.28 13.31 7.81

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Currency depreciation is shown to improve the current account in each country. A 50 percent depreciation increases the current account per GDP ratio by 12 percent in Thailand, and by 7 or 8 percent in Korea. The impact on Japan is relatively small as compared to the other two countries.

Effects of Reduction in World Imports

The developing economies in the East Asia had maintained high growth since the 1980s by attracting foreign direct investment and expanding exports. Their high growth had also promoted economic growth in other countries. The acknowledgement of the developing countries in the East Asia as a global center of growth was not only attribute to their own high growth, but also for their contributions in providing stimulus to the world economy. Unfortunately, the East Asian countries lost their high reputations in the crises. Japan was one of the countries shocked severely by the Asian crisis.

In this experiment, we suppose that world imports decline by 20 percent as compared with the base line case. According to Figure 15, the expected reduction in world imports has a deflationary impact on each country before its realization. In the case of Korea, GDP declines by more than 3 percent. Even in the case of Japan, it declines by more than 1 percent. After the decline of world imports is realized, the deflationary impact on GDP becomes 10 percent in Thailand, 6 percent in Korea, and 2.5 percent in Japan.

Figure 15. Effects of a Reduction in World Imports on GDP (anticipated case)

The expected reduction in world imports reduces both the human wealth and the market value of business firms. As a result, both consumption and investment decline in all countries. The

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decline in domestic demand such as consumption and investment reduces imports before the real reduction in world imports occurs. This is reflected in the improvement of the Current Account-GDP ratio prior to the reduction as shown in Table 3. This fact was observed in Japan in late 1997. During this period, business firms started to tighten their investment expenditures, and to adjust their excess inventory in advance. As a result, imports started to decline in late 1997 before the realization of the world decline in imports in 1998.

Table 3. Effects of a Reduction in World Imports (anticipated)

Japan Thailand Korea Japan Thailand Korea -3 -1.17 -5.26 -7.07 -3.17 -2.80 -10.21 -2 -1.91 -5.64 -7.69 -4.02 -3.27 -6.53 -1 -2.08 -5.99 -5.11 -4.30 -3.79 -10.11 0 -1.57 -7.54 -3.37 -3.94 -4.69 -8.68 1 -1.53 -6.38 -4.06 -4.28 -4.17 -6.24 2 -1.46 -5.44 -2.07 -4.42 -3.81 -8.07 3 -1.29 -4.36 -3.18 -4.45 -3.32 -7.94 4 -1.10 -3.20 -3.12 -4.44 -2.76 -6.72

-3 -1.04 -0.83 -5.48 0.15 1.92 2.66

-2 -1.46 -0.91 -4.23 0.25 2.06 2.55

-1 -1.53 -0.96 -4.07 0.28 2.23 2.42

0 -2.66 -10.27 -12.22 -1.34 -13.95 -5.69 1 -2.63 -8.36 -11.15 -1.30 -10.92 -5.32 2 -2.59 -8.50 -10.96 -1.29 -11.85 -5.56 3 -2.47 -8.24 -11.37 -1.29 -12.08 -5.40 4 -2.33 -8.03 -10.93 -1.30 -12.47 -5.55

Effect of an Increase in the Risk Premium

Evidence of a lending boom during the 1990s was observed throughout Asia. The ratio of private sector lending to GDP showed an upward trend in all countries. The main problem faced by the Asian countries was that a substantial portion of the loans made by financial institutions during this period was used for either financing investment of dubious profitability or speculative purchases. The Asian crisis severely deteriorated the balance sheets of domestic and foreign financial institutions alike.

A strong speculative attack on the baht forced Thailand to let the currency float. Driven by investors’ panic, the sharp currency depreciation increased the burden of Thailand’s foreign liability

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and bankrupt financial institutions. Korea suffered from a bankruptcy of its large conglomerate business group. Bankruptcies and financial distress caused serious financial difficulties in Korea's corporate sector. Japan also suffered from a financial crisis in 1997. A hike in the Japan premium of more than 1 percent in the international capital market resulted in the bankruptcies of Hokkaido Takushoku Bank and Yamaichi Securities.

The risk premium in our model estimates the market value of corporate business firms. If the risk premium increases, the market value of corporate business firms will decline. During the Asian crisis, the stock prices fell in all countries. According to the model, a fall in the market value deteriorates the investment behavior of business firms.

Figure 16. Effects of an Increase in the Risk Premium (anticipated)

In this experiment, we suppose that the risk premium increases by 5 percent. According to Figure 16, GDP declines by more than 5 percent in Japan and Korea, while the magnitude of the impact is relatively small in Thailand. The deterioration in the economy occurs immediately after expectations change. The difference in the magnitude among countries depends on its overall impact on investment behavior. The results of our experiment show that investment declines by around 20 percent both in Japan and Korea, while it declines by less than 10 percent in Thailand. The increase in the risk premium has a huge deflationary impact on the economy. As a result, consumption expenditures and the consumption deflator decline considerably.

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Table 4. Effects of an Increase in the Risk Premium (anticipated)

Consumption Current Account/GDP Japan Thailand Korea Japan Thailand Korea

-3 -1.04 -0.83 -5.48 0.15 1.92 2.66

-2 -1.46 -0.91 -4.23 0.25 2.06 2.55

-1 -1.53 -0.96 -4.07 0.28 2.23 2.42

0 -2.66 -10.27 -12.22 -1.34 -13.95 -5.69 1 -2.63 -8.36 -11.15 -1.30 -10.92 -5.32 2 -2.59 -8.50 -10.96 -1.29 -11.85 -5.56 3 -2.47 -8.24 -11.37 -1.29 -12.08 -5.40 4 -2.33 -8.03 -10.93 -1.30 -12.47 -5.55

-3 -6.01 -0.50 -11.68 1.20 1.15 6.35

-2 -5.33 -0.48 -8.76 1.21 1.21 5.79

-1 -4.78 -0.46 -7.57 1.18 1.25 5.05

0 -4.19 -0.43 -7.45 1.16 1.29 4.99

1 -3.66 -0.41 -6.23 1.14 1.32 4.60

2 -3.09 -0.39 -5.78 1.12 1.36 4.38

3 -2.56 -0.36 -5.66 1.10 1.38 4.37

4 -2.03 -0.32 -4.45 1.08 1.40 3.92

Effects of Capital Withdrawal

Because of the serious deterioration of macroeconomic conditions, Asian countries found that the cost of defending the value of their currencies was overwhelming and unsustainable, given the availability of international reserves. Speculative attacks became a final blow to currency valuation. Thailand sterilized its intervention in the spot and forward markets, but failed. During this period, a sizeable amount of capital was withdrawn from Asian countries. As a result, they suffered from tight money and high interest rates.

In this experiment, we assume that the amount of lending withdrawn by foreign financial institutions corresponds to 10 percent of imports. This simulation is undertaken only in Thailand and Korea. If the withdrawal is expected in advance, Korea's GDP increases before its realization, but declines after that. In Thailand however, GDP declines during both periods. According to our simulation, a 10 percent withdrawal of foreign capital reduces GDP by around 2 percent both in Thailand and Korea.

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Figure 17. Effects of a Withdrawal of Foreign Capital (anticipated)

Table 5. Effects of a Withdrawal of Foreign Capita1 (anticipated)

Consumption Investment Thailand Korea Thailand Korea

-3 -0.89 -2.12 -0.51 0.41

-2 -0.91 0.07 -0.57 5.04

-1 -0.87 3.24 -0.63 -2.14

0 -0.96 1.16 -13.08 -17.97

1 -0.72 3.30 -14.02 -18.59

2 -0.55 3.74 -14.99 -17.84

3 -0.35 4.15 -15.92 -20.21

4 -0.14 2.79 -16.81 -19.44

Consumer Price Current Account/GDP Thailand Korea Thailand Korea

-3 -0.14 -0.72 0.32 0.39

-2 -0.15 1.53 0.33 -0.50

-1 -0.14 0.62 0.33 -0.43

0 -1.15 -4.78 1.85 1.83

1 -0.88 -3.03 2.29 1.81

2 -0.88 -2.50 2.34 1.63

3 -0.81 -2.67 2.48 1.81

4 -0.76 -2.55 2.60 2.00

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References

Barrell, R., K. Dury, D. Holland, N. Pain and D. Velde, 1998, Financial market contagion and the effects of the Crises in East Asia, Russia and Latin America, NIESR

Fair, R.C., 1999, What can macro-econometric models say about Asia-type crises, The paper presented at the twelfth World Congress of the International Economic Association

Fair, R.C., and J.B. Taylor, 1983, Solution and Maximum Likelihood Estimation of Dynamic Nonlinear Rational Expectations Model, 1983, Econometrica 51, 1169-1185.

Hayashi, F., 1982, Tobin’s Marginal q and Average q: A Neoclassical Interpretation, Econometrica 50, 213-214.

Krugman, P., 1999, Balance sheets, the transfer problem, and financial crises, Mimeo.

Laxton D., Isard P., H. Farquee, E. Prasad, and B. Turtelboom, 1998, MUTIMOD Mark III: The Core Dynamic and Steady-State Model, IMF Occasional Paper 164.

Levin, A.T., J.H. Rogers and R.W. Tryon, 1997, A Guide to FRB/GLOBAL, International Finance Discussion Papers 588, Board of Governors of the Federal Reserve System

Tobin, J., 1969, A General Equilibrium Approach to Monetary Theory, Journal of Money, Credit and Banking 1, 15-69.

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The Japan Model

l: Real human wealth

JP_HW = (1 - jp_rtaxw) * JP_YL / (JP_PCP / 100) + 1 / (1 + jp_dis) * JP_HW(1)

2: Consumption

JP_CP = 22530.6 + .063374 * JP_HW + .069701 * JP_VAL(-1) / (JP_PCP / 100)

3: Market value of capital stock

JP_VAL = (1 - jp_rtaxc) * JP_YC + 1 / (1 + jp_risk + JP_RBOND / 100) * JP_VAL(1)

4: Tobin’s Q

JP_AVQ = JP_VAL / (JP_PIP / 100) / JP_KP(-1)

5: Real gross business investment

JP_IP = (-.031931 + .150763 * JP_AVQ + jp_depr) * JP_KP(-1)

6: Real government consumption JP_CG = JP_CGV / (JP_PCG / 100)

7: Real government fixed investment JP_IG = JP_IGV / (JP_PIG / 100)

8: Real export of goods and services JP_XGS = JP_XGSV / (JP_PXGS / 100)

9: Real import of goods and services

JP_MGS = JP_MGSV / (JP_PMGS / 100)

10: Gross domestic product

JP_GDP = JP_CP + JP_CG + JP_IHP + JP_IP + JP_IG + JP_J + JP_XGS - JP_MGS

11: Nominal consumption

JP_CPV = JP_CP * (JP_PCP / 100)

(27)

12: Nominal business investment JP_IPV = JP_IP * (JP_PIP / 100)

13: Nominal gross domestic production

JP_GDPV = JP_CPV + JP_CGV + JP_IHPV + JP_IPV + JP_IGV

+JP_JV + JP_XGSV - JP_MGSV

14: Capital Depreciation

JP_DEP = 3791.55 + 1.84474 * jp_depr * JP_KP(-1) * (JP_PIP / 100)

15: Capital Stock

JP_KP = JP_IP + (1 - jp_depr) * JP_KP(-1)

16: Net factor income from abroad

JP_NETFV = -186.737 + .955574 * JP_BPY

17: Nominal gross national products JP_GNPV = JP_GDPV + JP_NETFV

18: Wage rate

JP_W = jp_labor_share * (JP_GDPV - JP_TAXI - JP_DEP) / JP_L

19: Labor income

JP_YL = JP_L * JP_W

20: Corporate income

JP_YC = JP_GNPV - JP_YL - JP_TAXI - JP_DEP

21: Labor income tax

JP_TAXW = jp_rtaxw * JP_YL

22: Corporate income tax

JP_TAXC = jp_rtaxc * JP_YC

23: Indirect tax

JP_TAXI = jp_rtaxi * JP_GDPV

(28)

24: Government revenue

JP_REVG = JP_TAXI + JP_TAXW + JP_TAXC + JP_INTG

25: Government saving

JP_SG = JP_REVG - JP_CGV - JP_OCG

26: Government balance

JP_BG = JP_SG + JP_DEPG - JP_IGV - JP_JGV - JP_OIG

27: Accumulated government balance JP_KBG = JP_BG + JP_KBG(-1)

28: Government interest received

JP_INTG = 744.276 + .065071 * JP_KBG(-1)

29: Wholesale price index

LOG(JP_WPI / JP_WPI(-1)) = -.015062 + .361992 * LOG(JP_W / JP_W(-1)) + .249878 * LOG(JP_PMGS / JP_PMGS(-1))

30: Consumer price index

LOG(JP_PCP) = 2.35876 + .430700 * LOG(JP_W) + .136066 * LOG(JP_WPI)

31: Deflator of business investment

LOG(JP_PIP) = 2.73713 + .397100 * LOG(JP_WPI)

32: Deflator of exports of goods and services

LOG(JP_PXGS) = -.448948 + .768984 * LOG(JP_WPI) + .286208 * LOG(JP_REX)

33: Deflator of imports of goods and services

LOG(JP_PMGS) = -3.40076 + .841475 * LOG(JP_PIMD * JP_REX)

34: Deflator of government consumption

LOG(JP_PCG) = -.062300 + .756677 * LOG(JP_W) + .391353 * LOG(JP_WPI)

35: Deflator of government fixed investment

LOG(JP_PIG) = -.401389 + .755376 * LOG(JP_PIP) + .404872 * LOG(JP_W)

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36: Deflator of gross domestic products JP_PGDP = JP_GDPV / (JP_GDP / 100)

37: Exports of goods and services, Balance of payments

LOG(JP_BPXGS/JP_PXGS) = .291853 + .816511 * LOG(W_IM/W_PIM) -.299679 * LOG(JP_PXGS / JP_REX / W_PIM)

-.299679 * LOG(JP_PXGS(-1) / JP_REX(-1) / W_PIM(-1))

38: Nominal exports of goods and services, NA

LOG(JP_XGSV) = .333587 + .967244 * LOG(JP_BPXGS)

39: Imports of goods and services, Balance of payments

LOG(JP_BPMGS/JP_PMGS) = -20.0050 + 2.00469 * LOG(JP_GDP)

-.279824 * LOG(JP_PMGS(-1) / JP_WPI(-1))

40: Nominal imports of goods and services, NA

LOG(JP_MGSV) = -.191688 + 1.01568 * LOG(JP_BPMGS)

41: Net income received from abroad, Balance of payments JP_BPY/JP_REX = 4.94666 + .046125 * JP_KBPCD(-1)

42: Current account, Balance of payments

JP_BPC = JP_BPXGS - JP_BPMGS + JP_BPY + JP_BPTRN

43: Accumulated current account, US dollar base JP_KBPCD = JP_BPC / JP_REX + JP_KBPCD(-1)

44: Accumulated current account, Yen base JP_KBPC = JP_BPC + JP_KBPC(-1)

45: Government bond yield

JP_RBOND = 4.76202 + LOG(JP_MONEY / JP_GDPV)

-2.29873 * JP_KBPCD * JP_REX / JP_GDPV + .873305 * JP_RDIS

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The Thailand Model

1: Real human wealth

TH_HW = (1 - th_rtaxw) * TH_YL / (TH_PCP / 100) + 1 / (1 + th_dis) * TH_HW(1)

2: Consumption

TH_CP = 51.9024 + .080026 * TH_HW + .013289 * TH_VAL(-1) / (TH_PCP / 100) + .1000 * (1 - th_rtaxw) * TH_YW / (TH_PCP / 100)

3: Market value of capital stock

TH_VAL = (1 - th_rtaxc) * TH_YC + 1 / (1 + th_risk + TH_RBOND / 100) * TH_VAL(1)

4: Tobin’s Q

TH_AVQ = TH_VAL / (TH_PIP / 100) / TH_KP(-1)

TH_IP = (.035356 + .040842 * TH_AVQ + th_depr) * TH_KP(-1) + .614823 * TH_REX * TH_BPFIN / (TH_PIP / 100)

6: Real government consumption TH_CG = TH_CGV / (TH_PCG / 100)

7: Real government fixed investment TH_IG = TH_IGV / (TH_PIG / 100)

8: Real export of goods and services

TH_XGS = TH_XGSV / (TH_PXGS / 100)

TH_MGS = TH_MGSV / (TH_PMGS / 100)

TH_GDP = TH_CP + TH_CG + TH_IP + TH_IG + TH_JSD + TH_XGS - TH_MGS

TH_CPV = TH_CP * (TH_PCP / 100)

(31)

12: Nominal business investment TH_IPV = TH_IP * (TH_PIP / 100)

TH_GDPV = TH_CPV + TH_CGV + TH_IPV + TH_IGV + TH_JSDV + TH_XGSV - TH_MGSV

TH_DEP = th_depr * TH_KP(-1) * (TH_PIP / 100)

15: Capital Stock

TH_KP = TH_IP + (1 - th_depr) * TH_KP(-1)

TH_NETFV = -3.74038 + .114959E-02 * TH_BPY * TH_REX

17: Nominal gross national products TH_GNPV = TH_GDPV + TH_NETFV

18: Wage rate

TH_W = th_labor_share * (TH_GDPV - TH_TAXI - TH_DEP) / TH_L

19: Labor income

TH_YL = TH_L * TH_W

TH_YC = TH_GNPV - TH_YL - TH_TAXI - TH_DEP

TH_TAXW = th_rtaxw * TH_YL

TH_TAXC = th_rtaxc * TH_YC

23: Indirect tax

TH_TAXI = th_rtaxi * TH_GDPV

(32)

TH_REVG = TH_TAXI + TH_TAXW + TH_TAXC - TH_INTG

TH_SG = TH_REVG - TH_CGV - TH_OCG

TH_BG = TH_SG + TH_DEPG - TH_IGV - TH_OIG

27: Accumulated government balance TH_BOND = TH_BG + TH_BOND(-1)

28: Government interest payment

TH_NTG = th_rbond / 100 * TH_BOND(-1)

LOG(TH_WPI) = 3.39210 + .221977 * LOG(TH_W) + .370477 * LOG(TH_PMGS)

LOG(TH_PCP) = 3.79500 + .260971 * LOG(TH_W) + .402331 * LOG(TH_WPI)

LOG(TH_PIP) = -.456003 + 1.16963 * LOG(TH_WPI)

LOG(TH_PXGS) = -1.87975 + 1.06877 * LOG(TH_WPI) + .561793 * LOG(TH_REX)

33: Deflator of imports of goods and services

LOG(TH_PMGS) = -.989928 + .748466 * LOG(TH_PIMD * TH_REX)

LOG(TH_PCG) = 6.71978 + .583236 * LOG(TH_W)

35: Deflator of government fixed investment

LOG(TH_PIG) = 1.38847 + .785307 * LOG(TH_PIP) + .109278 * LOG(TH_W)

(33)

36: Deflator of gross domestic products TH_PGDP = TH_GDPV / (TH_GDP / 100)

LOG(TH_BPXGS / TH_PXGS) = -5.96492 + 2.57854 * LOG(W_IM / W_PIM) -.890289 * LOG(TH_PXGS / TH_REX / W_PIM)

-.890289 * LOG(TH_PXGS(-1) / TH_REX(-1) / W_PIM(-1))

LOG(TH_XGSV) = -6.94257 + 1.00230 * LOG(TH_BPXGS * TH_REX)

LOG(TH_BPMGS / TH_PMGS) = -4.05423 + 1.77385 * LOG(TH_GDP) -.841761 * LOG(TH_PMGS / TH_WPI) -.841761 * LOG(TH_PMGS(-1) / TH_WPI(-1))

LOG(TH_MGSV) = -6.86636 + .996040 * LOG(TH_BPMGS * TH_REX)

41: Net income received from abroad, Balance of payments TH_BPY = 2.70409 + .040893 * TH_KBPC(-1)

TH_BPC = TH_BPXGS - TH_BPMGS + TH_BPY + TH_BPTRN

43: Accumulated current account, US dollar base TH_KBPC = TH_BPC + TH_KBPC(-1)

TH_RBOND = 6.41566 + LOG(TH_MONEY / TH_GDPV)

-0.00500 * TH_KBPC * TH_REX / TH_GDPV + .801319 * TH_RDIS

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The Korea Model

1: Real human wealth

KR_HW = (1-kr_rtaxw) * KR_YL / (KR_PCP / 100) + 1 / (1 + kr_dis) * KR_HW(1)

2: Consumption

KR_CP = -30809.4 + .061843 * KR_HW

+ .107272 * KR_VAL(-1) / (KR_PCP / 100)

+ .1000 * (1 - kr_rtaxw) * KR_YW / (KR_PCP / 100)

3: Market value of capital stock KR_VAL = (1 - kr_rtaxc) * KR_YC

+ 1 / (1 + kr_risk + KR_RBOND / 100) * KR_VAL(1)

4: Tobin’s Q

KR_AVQ = KR_VAL / (KR_PIP / 100) / KR_KP(-1)

KR_IP = (-.045789 + .089960 * KR_AVQ + kr_dcpr) * KR_KP(-1) + .00202295 * KR_REX * KR_RSV / (KR_PIP / 100)

6: Real government consumption KR_CG = KR_CGV / (KR_PCG / 100)

7: Real government fixed investment KR_IG = KR_IGV / (KR_PIG / 100)

8: Real export of goods and services

KR_XGS = KR_XGSV / (KR_PXGS / 100)

KR_MGS = KR_MGSV / (KR_PMGS / 100)

KR_GDP = KR_CP + KR_CG + KR_IP + KR_IG + KR_JSD + KR_XGS - KR_MGS

(35)

KR_CPV = KR_CP * (KR_PCP / 100)

12: Nominal business investment KR_IPV = KR_IP * (KR_PIP / 100)

KR_GDPV = KR_CPV + KR_CGV + KR_IPV + KR_IGV + KR_JSDV + KR_XGSV - KR_MGSV

KR_DEP = 2650.88 + .686993 * kr_depr * KR_KP(-1) * (KR_PIP / 100)

15: Capital Stock

KR_KP = KR_IP + (1 - KR_depr) * KR_KP(-1)

KR_NETFV = -235.401 + .984979E-03 * KR_BPY * KR_REX

17: Nominal gross national products KR_GNPV = KR_GDPV + KR_NETFV

18: Wage rate

KR_W = kr_labor_share * (KR_GDPV - KR_TAXI - KR_DEP) / KR_L

19: Labor income

KR_YL = KR_L * KR_W

KR_YC = KR_GNPV - KR_YL - KR_TAXI - KR_DEP

KR_TAXW = kr_rtaxw * KR_YL

KR_TAXC = kr_rtaxc * KR_YC

(36)

23: Indirect tax

KR_TAXI = kr_rtaxi * KR_GDPV

KR_REVG = KR_TAXI + KR_TAXW + KR_TAXC + KR_INTG

KR_SG = KR_REVG - KR_CGV - KR_OCG

KR_BG = KR_SG - KR_IGV - KR_OIG

27: Accumulated government balance KR_BOND = KR_BG + KR_BOND(-1)

28: Government interest payment

KR_INTG = kr_rbond / 100 * KR_BOND(-1)

LOG(KR_WPI) = -.242793 + .187205 * LOG(KR_W) + .322359 * LOG(KR_PMGS)

LOG(KR_PCP) = -1.11932 + .463266 * LOG(KR_W) + .921581 * LOG(KR_WPI)

LOG(KR_PIP) = -.216044 + 1.36777 * LOG(KR_WPI)

LOG(KR_PXGS) = -1.82181 + .437409 * LOG(KR_WPI) + .261355 * LOG(KR_REX)

33: Deflator of imports of goods and services KR_PMGS = KR_PIMD * KR_REX

LOG(KR_PCG) = -1.34604 + .584362 * LOG(KR_W) + .748789 * LOG(WPI)

(37)

35: Deflator of government fixed investment KR_PIG = KR_PIP

36: Deflator of gross domestic products KR_PGDP = KR_GDPV / (KR_GDP / 100)

LOG(KR_BPXGS/KR_PXGS) = -3.90802 + 1.55511 * LOG(W_IM/W_PIM) -.724014 * LOG(KR_PXGS / KR_REX / W_PIM) -.724014 * LOG(KR_PXGS(-1) / KR_REX(-1) / W_PIM(-1))

LOG(KR_XGSV) = -6.65842 + .986634 * LOG(KR_BPXGS * KR_REX)

LOG(KR_BPMGS/KR_PMGS) = -5.15709 + 1.83488 * LOG(KR_GDP) -.598641 * LOG(KR_PMGS / KR_WPI) -.598641 * LOG(KR_PMGS(-1) / KR_WPI(-1))

LOG(KR_MGSV) = -6.83684 + .996161 * LOG(KR_BPMGS * KR_REX)

41: Net income received from abroad, Balance of payments KR_BPY = -792.998 + .063490 * KR_KBPC(-1)

KR_BPC = KR_BPXGS - KR_BPMGS + KR_BPY + KR_BPTRN

43: Accumulated current account, US dollar base KR_KBPC = KR_BPC + KR_KBPC(-1)

KR_RBOND = 6.24915 + LOG(KR_MONEY / KR_GDPV)

-0.0050 * KR_KBPC * KR_REX / KR_GDPV + 1.02097 * KR_RDIS

(38)

VariabIe List

Variable Description

AVQ Tobin’s average Q BG Government balance BPC Current account, BOP base

BPMGS Imports of goods and services, BOP base BPTRN Net transfer payment, BOP base

BPXGS Exports of goods and services, BOP base BPY Factor income from abroad, BOP base

CG Government consumption expenditures, Real CGV Government consumption expenditures, Nominal CP Private consumption expenditures, Real

CPV Private consumption expenditures, Nominal DEP Depreciation

depr Depreciation rate dis Discount factor

GDP Gross domestic products, Real GDPV Gross domestic products, Nominal GNPV Gross national products, Nominal

HW Real Human Wealth

IG Government fixed Investment, Real IGV Government fixed investment, Nominal IHP Private housing investment, Real IHPV Private housing investment, Nominal INTG Government interest received

IP Private fixed Investment, Real IPV Private fixed investment, Real J Inventory investment, Real JV Inventory investment, Nominal

JG Government inventory investment, Real JGV Government inventory investment, Nominal JP Private inventory investment, Real

JPV Private inventory investment, Nominal KBOND Government bond

KBPC Accumulated current account, BOP base

KBPCD Accumulated current account, BOP base, US$ base KP Private business capital stock

L The number of labor labor_share Labor share

MGS Imports of goods and services, Real MGSV Imports of goods and services, Nominal MONEY Money and quasi money

NETFV Net factor income from abroad

OCG Government other consumption expenditures OIG Government other capital expenditures

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PCG Government consumption deflator PCP Private consumption deflator PGDP Gross domestic product deflator PIG Government fixed investment deflator PIP Private fixed investment deflator PMGS Imports of goods and services deflator

PMGSD Imports of goods and services deflator, US$ base PXGS Exports of goods and services deflator

Rbond Government bond rate Rdis discount rate

REVG Government revenue

REX Foreign exchange rate per US$ Risk Risk factor

Rtaxc tax rate of corporate income Rtaxi tax rate of indirect tax Rtaxw tax rate of labor income SD Statistical discrepancy, Real SDV Statistical discrepancy, Nominal SG Government savings

TAXC Tax on corporate in come TAXI Indirect tax

TAXW Tax on labor income

VAL Value of corporate business firms

W Wage

W_IM World import, Nominal W_PIM Price index of world import WPI Wholesale price investment

XGS Exports of goods and services, Real XGSV Exports of goods and services, Nominal YC Corporate income

YL Labor income

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Figure 18. Current Account / GDP Ratio

Figure 19. Exchange Rate Index

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Figure 20. Real Exports and Imports : Japan