yamaguchi, k. (2011), “workings of a public money system...
TRANSCRIPT
Workings of A Public Money System
of Open Macroeconomies– Modeling the American Monetary Act Completed –
(A Revised Version)
Kaoru Yamaguchi ∗
Doshisha UniversityKyoto 602-8580, Japan
E-mail: [email protected]
Abstract
Being intensified by the recent financial crisis in 2008, debt crises seemto be looming ahead among many OECD countries due to the runawayaccumulation of government debts. This paper first explores them as asystemic failure of the current debt money system. Secondly, with anintroduction of open macroeconomies, it examines how the current sys-tem can cope with the liquidation of government debt, and obtains thatthe liquidation of debts triggers recessions, unemployment and foreigneconomic recessions contagiously. Thirdly, it explores the workings of apublic money system proposed by the American Monetary Act and findsthat the liquidation under this alternative system can be put into effectwithout causing recessions, unemployment and inflation as well as for-eign recessions. Finally, public money policies that incorporate balancingfeedback loops such as anti-recession and anti-inflation are introduced forcurbing GDP gap and inflation. They are posed to be simpler and moreeffective than the complicated Keynesian policies.
1 Introduction: Public vs Debt Money
I have explored in the paper [16]1 how accumulating government debts couldbe liquidated under two different macroeconomic systems; that is, a current
∗The original paper was presented at the 29th International Conference of the SystemDynamics Society, Washington D.C., USA, July 25, 2011. On the following day, July 26, itwas presented at the US Congressional Briefing, Cannon 402, sponsored by the CongressmanDennis Kucinich. Then, it is moderately revised by adding comparative analyses of liquidationpolicies under a debt money system, and presented with the same title at the 7th Annual AMIMonetary Reform Conference in Chicago, USA, Sept. 30, 2011.
1With its modest revision, the paper was presented at the monetary reform conf. inChicago, organized by the American Monetary Institute, on Oct. 1, 2010, for which the
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macroeconomic system of money as debt, and a debt-free macroeconomic systemadvocated by the American Monetary Act. What I have found is that theliquidation of government debt under the current macroeconomic system ofmoney as debt is very costly; that is, it triggers economic recessions, whilethe liquidation process under a debt-free money system can be accomplishedwithout causing recessions and inflations. The results are, however, obtained ina simplified closed macroeconomic system in which no labor market exists.
Accordingly, the purpose of this paper is to expand the previous simplemacroeconomic system to complete open macroeconomies in which labor mar-ket and foreign exchange market exist, and analyze if similar results could beobtained in the open macroeconomies for a system of money as debt and adebt-free money system. For the examination, I have felt a strong necessityto briefly redefine money and its system in this introductory section to avoidfurther confusions caused by different usage of terminologies. In the previouspaper, a system of money as debt was used to describe the current monetarysystem, and a debt-free money system was used as a system that is proposed bythe American Monetary Act. Let us redefine these terminologies in a uniformfashion as follows.
Public Money
From early days in history money has been in circulation as a legal tender asAristotle (384-322 BC) phrased that “Money exists not by nature but by law[17].” Hence, money has been by definition a fiat money as legal tender. Moneythus created, whether it could be tangible or intangible, has to have the followingthree features as explained by many economics textbooks.
• Medium of Exchange
• Unit of Account
• Store of Value
Money
Commodity
Receipts Payments
Sales Purchases
Figure 1: Public Money
Using system dynamics con-cept of stock and flow, thesefunctions of money may beuniformly illustrated in Figure1 in which flows of money suchas receipts and payments ac-complish counter-transactionsof sales and purchases of com-modity (means of exchange)according to a uniform scale(unit of account), and the
following award was given; “Advancement of Monetary Science and Reform Award to Prof.Kaoru Yamaguchi, Kyoto, Japan, For his advanced work in modeling the effects on nationaldebt of the American Monetary Act”.
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Fiat Money as Legal Tender
Public Money Debt Money
Non-metal Shell, Cloth (Silk)Commodities Woods, Stones, etc
Metal Non-precious MetalsCoinage Copper, Silver, Gold
Paper Sovereign Notes Gold(smith) CertificatesNotes Government Notes (Central)Bank Notes
Intangible DepositsNumbers (Credit by Loan)
Digits Electronic Substitutes Electronic Substitutes
Table 1: Public vs Debt Money
amount of money thus circulated is stored as a stock of money as a resultof these transactions (store of value). In system dynamics stocks of money andcommodity can be said to co-flow all the time in an opposite direction.
Money, having the above three features as a legal tender, could take a formof commodities such as shell, silk (cloth) and stone, of precious metals such ascopper, silver and gold, of paper such as Goldsmith and gold certificates andbank notes, and of intangible numbers and electronic digits such as depositsand credits. In short, any form that performs three features has been generallyaccepted as money that has a purchasing power.
Among these various forms of money, let us define public money here as theone that is a fiat money of legal tender and issued only by the government andsovereignty as public utility for transactions. Examples of public money aresummarized in Table 1.
Debt Money
Tangible money currently in use are coinage and bank notes. Coins are mintedby the government as subsidiary currency. Hence, it is public money by def-inition. On the other hand, bank notes are issued by central banks that areindependent of the government and privately owned in many countries. For in-stance, Federal Reserve System, the central bank in the United States, is 100%privately owned [2] and Bank of Japan is 45% privately owned. Hence, govern-ments are obliged to borrow from central banks and in this sense bank notesare regarded as a part of debt money.
Theoretically, the issuance of money by the private organizations can be pos-sible only when government or sovereignty legally allow them to create money,since “money exists by law” as pointed out above. Historically this occurredwhen Bank of England was founded in 1694 and endowed with the right to is-sue money as its bank notes. In the United States, this was instituted by theFederal Reserve Act in 1913.
In addition to the tangible money such as bank notes and coinage, bank
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deposits or credits created as loans by commercial banks also play a role ofmoney, though intangible, because they can be withdrawn any time, at request,for transactions. This process of credit creation is made possible by the so-calleda fractional reserve banking system. For detailed analysis see [10].
In sum, under the current financial system, currency in circulation such asbank notes and coinage and bank deposits play a role of money. The amountof money that is available at a certain point of time is called money supply orstock, which is thus defined as
Money Supply = Currency in Circulation + Deposits (1)
Commodity
SalesPurchases
Money(Currency inCirculation)
Deposits
Loan
Money Supply
Receipts (MS) Payments (MS)
Figure 2: Debt Money
In system dynamics ter-minology, it is nothing buta money stock as illus-trated in Figure 2. To dis-tinguish this type of moneyfrom public money, let uscall it debt money, be-cause money of this typeis only created when gov-ernment and commercialbanks come to borrowfrom central banks (high-powered money), and pro-ducers and consumers cometo borrow from commercial banks (bank deposits and credits are called low-powered money). In my previous paper [16], this system is called system ofmoney as debt. Almost all of macroeconomic textbooks in use such as [4], [5],[6], [3] justify the current macroeconomic system of debt money without men-tioning an alternative system, if any, such as the money system proposed by theAmerican Monetary Act to be explained below.
The American Monetary Act
After the Great Depression in 1929, two banking reforms were proposed to avoidfurther serious recessions; that is, the Banking Act of 1933 known as the Glass-Steagall Act and the Chicago Plan. The Glass-Steagall Act was intended to sep-arate banking activities between Wall Street investment banks and depositorybanks. The act was unfortunately repealed in 1999 by the Gramm-Leach-BlileyAct. This repeal was criticized as having triggered the recent financial crisis ofsubprime mortgage loans, following the collapse of Lehman Brothers in 2008.On-going movement of financial reforms in the US is an attempt to bring backstricter banking regulations in the spirit of the Glass-Steagal Act.
The other reform was simultaneously proclaimed by the great economists in1930s such as Henry Simons and Paul Douglas of Chicago, Irving Fisher of Yale,Frank Graham and Charles Whittlesley of Princeton, Earl Hamilton of Duke,
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and Willford King, etc. [18], who had seen a debt money system as a rootcause of the Great Depression. Their solution for avoiding a possible “GreatDepression” in the future is called the Chicago Plan. For instance, Irving Fisher,a great monetary economist in those days, was active in establishing a monetaryreform to stabilize the economy out of recessions such as the Great Depression.His own plan is known as “100% Money Plan”
I have come to believe that the plan, ”properly worked out andapplied, is incomparably the best proposal ever offered for speedilyand permanently solving the problem of depressions; for it wouldremove the chief cause of both booms and depressions, namely theinstability of demand deposits, tied as they are now, to bank loans.”[1, p. 8]
In contrast with the Glass-Steagal Act, the Chicago Plan has failed to be im-plemented.
The American Monetary Act2 endeavors to restore the proposal of theChicago Plan or 100% Money Plan by replacing the Federal Reserve Act of1913. In our terminology above, it is nothing but the restoration of a publicmoney system from a debt money system. Specifically, the Act tries to incor-porate the following three features. For details see [16] and [17, 18].
• Governmental control over the issue of money
• Abolishment of credit creation with full reserve ratio of 100%
• Constant inflow of money to sustain economic growth and welfare
When full reserve system is implemented by the Act, bank reserves becomeequal to deposits so that we have
Money Supply = Currency in Circulation + Deposits= Currency in Circulation + Reserves= High-Powered Money (2)
Accordingly, under the public money system, money is created only by thegovernment, and money supply becomes public money only3.
As a system dynamics researcher, I have become interested in the systemdesign of macroeconomics proposed by the American Monetary Act, and posed a
2On Dec. 17, 2010, a bill based on the American Monetary Act was introduced to theUS House Committee on Financial Services by the congressman Dennis Kucinich. This bill iscalled H.R. 6550 National Emergency Employment Defense Act of 2010 (NEED). A similarproposal “Towards A Twenty-First Century Banking And Monetary System” was recentlysubmitted jointly by PositiveMoney, nef(the new economics foundation), and Prof. RichardWerner of the Univ. of Southampton, to the Independent Commission on Banking, UK.
3Money supply is also defined in terms of high-powered money as
Money Supply = m ∗ High-Powered Money (3)
where m is a money multiplier. Under a full reserve system, money multiplier becomes unitary,m = 1, so that money can no longer be created by commercial banks.
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question whether this public money system of macroeconomy can solve the mostimminent problem our economy is facing; that it, accumulation of governmentdebt. My previous work [16] positively answered the question under a simplemodeling framework. Before exploring it under the complete model of openmacroeconomies here, let us probe how serious our current issue of accumulatingdebt is.
2 Debt Crises As A Systemic Failure
Debt Crises Looming Ahead
Being intensified by the recent financial crisis following the collapse of LehmanBrothers in 2008, severe crisis of sovereign or government debts seems to belooming ahead. Let us explore how serious accumulating national debts are.Table 2 shows that, among 33 OECD countries, 18 countries are suffering fromhigher debt-to-GDP ratios of more than 50% in 2010. Average ratio of these 33countries is 66.7%, while world average ratio of 131 countries is 58.3%4. Thisimplies that developed countries are facing debt crises more seriously than manydeveloping countries. .
Country Ratio(%) Country Ratio(%)
Japan 196.4 Israel 77.3Greece 144.0 Germany 74.8Iceland 123.8 Hungary 72.1Italy 118.1 Austria 68.6Belgium 102.5 United Kingdom 68.1Ireland 98.5 Netherlands 64.6United States 96.4 Spain 63.4France 83.5 Poland 50.5Portugal 83.2 OECD 66.7Canada 82.9 World 58.3
Table 2: Public Debt-GDP Ratio(%) of OECD Countries in 2010
Let us now take a look at the US national debt. Following the Lehman shockin 2008, US government is forced to bail out troubled banks and corporationswith taxpayers’s money, and the Fed continued printing money to purchase poi-soned subprime and related securities. In fact, according to the Federal ReserveStatistical Release H.4.1 the Fed assets jumped more than doubles in a yearfrom $905 billion, Sept. 3, 2008, to $2,086 billion on Sept. 2, 2009. This un-usual yearly increase was mainly caused by the abnormal purchase of federal
4Data of 131 countries for 2010 are taken from CIA Factbook athttps://www.cia.gov/library/publications/the-world-factbook/rankorder/2186rank.htmlexcept USA Data, which is taken from US National Debt Clock Real Time on Feb. 12, 2011at http://www.usdebtclock.org/
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agency debt securities ($119 billion) and mortgage-backed securities ($625 bil-lion). In addition, US government is obliged to spend more budget on war inMiddle East. These factors contributed to accumulate US national debt beyond14 trillion dollars as of Feb. 2011, more than 4 trillion dollars’ increase sinceLehman shock in Sept. 2008. Figure 3 (line 2) illustrates how fast US nationaldebt has been accumulating almost exponentially5. From a simple calibration
US National Debt
32,000
24,000
16,000
8,000
02 2 2 2
22
22 2
2
2
1 1 1 1 1 1 11
11
1
1
1
1
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
Time (Year)
Bil
lion
Doll
ars
US Debt : Forecasted Debt 1 1 1 1 1 1 1 1
US Debt : US National Debt 2 2 2 2 2 2 2 2
Figure 3: U.S. National Debt and its Forecast: 1970 - 2020
of data between 1970 through 2011 , the best fit of their exponential growthrate is calculated to be 9% !, which in turn implies that a doubling time ofaccumulating debt is 7.7 years. If the current US national debt continues togrow at this rate, this means that the doubling year of the 14 trillion dollars’debt in 2011 will be 2019. In fact, our debt forecast of that year becomes 29trillion dollars. Moreover, in 2020, the US national debt will become higherthan 31 trillion dollars, while US GDP in 2020 is estimated to be 24 trilliondollars according to the Budget of the U.S. Government, Fiscal Year 2011; thatis, the debt-to-GDP ratio in the US will be 129%!.
Can such an exponentially increasing debt be sustained. From system dy-namics point of view, it is absolutely impossible. In fact, following the financialcrisis of 2008, sovereign debt crisis hit Greece in 2009, then Ireland, and nowPortugal is said to be facing her debt crisis. Debt crises are indeed loomingahead among OECD countries.
A Systemic Failure of Debt Money
From the quantity theory of money MV = PT , where M is money supply, Vis its velocity, P is a price level and T is the amount of annual transactions, it
5Data illustrated in the Figure are obtained from TreasuryDirect Web page,http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt.htm
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can be easily foreseen that transactions of a constantly growing economy PTdemand for more money M being incessantly put into circulation. Under thecurrent debt money system this increasing demand for money has been met bythe following monetary standards.
Gold Standard Failed (1930s) Historically speaking gold standard originatedfrom the transactions of goldsmith certificates, which eventually developedinto convertible bank notes with gold. Due to the limitation of the sup-ply of gold, this gold standard system of providing money supply wasabandoned in 1930s, following the Great Depression.
Gold-Dollar Standard Failed (1971) Gold standard system was replacedwith the Bretton Woods system of monetary management in 1944. Underthe system, convertibility with gold is maintained indirectly through USdollar as a key currency, and accordingly called the gold-dollar standard.Due to the increasing demand for gold from European countries, US pres-ident Richard Nixon was forced to suspend gold-dollar convertibility in1971, and the so-called Nixon Shock hit the world economy.
Dollar Standard Collapsing (2010s?) Following the Nixon shock, flexibleforeign exchange rates were introduced, and US dollar began to be usedas a world-wide key currency without being supported by gold. As aresult, central banks acquired a free hand of printing money without beingconstrained by the amount of gold. Due to the exponentially accumulatingdebt of the US government as observed above, US dollar is now under apressure of devaluation, and the dollar standard system of the last 40 yearsis destined to collapse sooner or later.
As briefly assessed above, we are now facing the third major systemic failuresof debt money, following the failures of gold standard and gold-dollar standardsystems. Specifically, our current debt money system seems to be heading to-ward three impasses: defaults, financial meltdown and hyper-inflation. By usingcausal loop diagram of Figure 4, let us now explore a conceivable systemic failureof the current debt money system.
Defaults
A core loop of the systemic failure is the debt crisis loop. This is a typicalreinforcing loop in which debts increase exponentially, which in turn increasesinterest payment, which contributes to accumulate government deficit into debt.In fact, interest payment is approximately as high as one third of tax revenuesin the US and one fourth in Japan. Eventually, governments may get con-fronted with more difficulties to continue borrowing for debt reimbursements,and eventually be forced to declare defaults.
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Debt
BorrowingInterest
Payment
Interest
Rate
Budget
Deficit
Tax
Revenues
Government
Expenditures
+
-
+
+
+
+
Debt Crisis
+
+
GovernmentSecurityPrices
-
Bank/ Corporate
Collapses
-
Bailout / Stimulus
Packages
+
+
Money
Supply
-Housing
Bubbles
-
Financial Crisis
Hyper-
Inflation
+
Spending
+
DefaultsFinancialMeltdown
+
+
Forced Money
Supply
Figure 4: Impasses of Defaults, Financial Meltdown and Hyper-Inflation
Financial Meltdown6
Exponential growth of debt eventually leads to the second loop of financial crisis.To be specific, a runaway accumulation of government debt may cause nominalinterest rate to increase eventually, because government would be forced to keepborrowing by paying higher interests7. Higher interest rates in turn will surelytrigger a drop of government security prices, deteriorating values of financialassets among banks, producers and consumers. Devaluation of financial assetsthus set off may force some banks and producers to go bankrupt in due course.
Under such circumstances, government would be forced to bail out or intro-duce another stimulus packages, increasing deficit as flow and piling up debt asstock. This financial crisis loop will sooner or later lead our economy toward
6This section name was originally “Meltdown” in the paper submitted in the morning ofMarch 11, 2011, when eastern part of Japan was hit by historical earthquake and tsunamiin the afternoon of the day, followed by the meltdown of the Fukushima Dai-ichi nuclearpower plants in a day or so. To distinguish it from the nuclear meltdown, it is revised as“Financial Meltdown”. We are indeed at a turning point of history revolved by these twomajor meltdowns.
7This feedback loop from the accumulating debt to the higher interest rate is not yet fullyincorporated in our model below.
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a second impasse which is in this paper called financial meltdown, following[8]. Recent financial crisis following the burst of housing bubbles, however, isnothing but a side attack in this financial crisis loop, though reinforcing thedebts crisis. Tougher financial regulations being considered in the aftermathof financial crisis might reduce this side attack. Yet they do not vanquish thefinancial crisis loop originating from the debts crisis loop in Figure 4.
Hyper-Inflation
To avoid higher interest rate caused by two reinforcing crisis loops, centralbanks would be forced to increase money supply (balancing loop), which in-evitably leads to a third impasse of hyper-inflation. Incidentally, this possibilityof hyper-inflation in the US may be augmented by the aftermath behaviors ofthe Fed following the Lehman Shock of 2008. In fact, as seen above mone-tary base or high-powered money doubled from $905 billion, Sept. 3, 2008, to$1,801 billion, Sept. 2, 2009, within a year (FRB: H.3 Release). Thanks to thedrastic credit crunch, however, this doubling increase in monetary base didn’ttrigger inflation so far. In other words, M1 consisting of currency in circulation,traveler’s checks, demand deposits, and other checkable deposits, only increasedfrom $1,461 billion in Sept. 2008 to $1,665 billion in Sept. 2009 (FRB: H.6Release), which implies that money multiplier dropped from 1.61 to 0.92. As ofFeb. 2011, it is 0.91. In short, traditional monetary expansion policy by the Feddidn’t work to restore the US economy so far. Yet, these tremendous increasein monetary base will, as a monetary bomb, force the US dollars to be devaluedsooner or later. Once it gets burst, hyper-inflation will attack world economyin the foreseeable future. One of the main subject of G20 meetings last year inSeoul, Korea was how to avoid currency wars being led by the devaluation ofdollar.
As discussed above in this way, current economies built on a debt moneysystem seems to be getting trapped into one of three impasses, and governmentmay be eventually destined to collapse due to a heavy burden of debts. Theseare hotly debated scenarios about the consequences of the rapidly accumulatingdebt in Japan, whose debt-GDP ratio in 2009 was 196.4% as observed above; thehighest among OECD countries! Greece has almost experienced this impasse in2009.
After all, current macroeconomic system has been structurally fabricated bythe Keynesian macroeconomic policy framework in which it is proposed thatthe additional government expenditure can rescue the troubled economy fromrecession. Yet, it fails to analyze why this fiscal policy is destined to accumulategovernment debt as mentioned above. In fact, even though GDP gap is very hugein Japan, yet due to the fear of runaway accumulation of debt, the Japanesegovernment is very reluctant to stimulate the economy and, in this sense, itseems to have totally lost its discretion of public policies for the welfare ofpeople even though production capacities and workers have been sitting idleand ready to be called in service. In other words, Keynesian fiscal policy cannot
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be applied to the troubled Keynesian macroeconomy. With zero interest rate,its monetary policy has already lost its discretion as well. Isn’t this an irony ofthe Keynesian theory? Current debt money system of macroeconomy seems tohave fallen into the dead-end trap.
With these preparatory analysis of the current economic situations in mind,we are now in a position to expand our previous model to a complete modelof open macroeconomics, and examine how government debt can be liquidatedunder two different money systems; that is, debt money system and publicmoney system.
3 Modeling A Debt Money System
Since 2004 I have been working step-by-step on constructing macroeconomicmodels in [10], [11], [12] and [13] based on the method of accounting system dy-namics developed in [9]. This series of macroeconomic modeling was completedin [14] with a follow-up analytical refinement method of price adjustment mech-anism in [15]. The model of open macroeconomies in this paper is mostly basedon the model in [14].
For the convenience of the reader, main transactions of the open macroe-conomies by producers, consumers, government, banks and the central bank arereplicated here.
Producers
Main transactions of producers, which are illustrated in Figure 33 in the ap-pendix, are summarized as follows.
• Out of the GDP revenues producers pay excise tax, deduct the amount ofdepreciation, and pay wages to workers (consumers) and interests to thebanks. The remaining revenues become profits before tax.
• They pay corporate tax to the government out of the profits before tax.
• The remaining profits after tax are paid to the owners (that is, consumers)as dividends, including dividends abroad. However, a small portion ofprofits is allowed to be held as retained earnings.
• Producers are thus constantly in a state of cash flow deficits. To makenew investment, therefore, they have to borrow money from banks andpay interest to the banks.
• Producers imports goods and services according to their economic activi-ties, the amount of which is assumed to be a portion of GDP in our model,though actual imports are also assumed to be affected by their demandcurves.
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• Similarly, their exports are determined by the economic activities of aforeign economy, the amount of which is also assumed to be a portion offoreign GDP.
• Produces are also allowed to make direct investment abroad as a portionof their investment. Investment income from these investment abroad arepaid by foreign producers as dividends directly to consumers as ownersof assets abroad. Meanwhile, producers are required to pay foreign in-vestment income (returns) as dividends to foreign investors (consumers)according to their foreign financial liabilities.
• Foreign producers are assumed to behave in a similar fashion as a mirrorimage of domestic producers
Consumers
Main transactions of consumers, which are illustrated in Figure 34 in the ap-pendix, are summarized as follows.
• Sources of consumers’ income are their labor supply, financial assets theyhold such as bank deposits, shares (including direct assets abroad), anddeposits abroad. Hence, consumers receive wages and dividends fromproducers, interest from banks and government, and direct and financialinvestment income from abroad.
• Financial assets of consumers consist of bank deposits and governmentsecurities, against which they receive financial income of interests frombanks and government.
• In addition to the income such as wages, interests, and dividends, con-sumers receive cash whenever previous securities are partly redeemed an-nually by the government.
• Out of these cash income as a whole, consumers pay income taxes, andthe remaining income becomes their disposal income.
• Out of their disposable income, they spend on consumption. The remain-ing amount is either spent to purchase government securities or saved.
• Consumers are now allowed to make financial investment abroad out oftheir financial assets consisting of stocks, bonds and cash. For simplicity,however, their financial investment are assumed to be a portion out oftheir deposits . Hence, returns from financial investment are uniformlyevaluated in terms of deposit returns.
• Consumers now receive direct and financial investment income. Similarinvestment income are paid to foreign investors by producers and banks.The difference between receipt and payment of those investment income
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is called income balance. When this amount is added to the GDP rev-enues, GNP (Gross National Product) is calculated. If capital depreciationis further deducted, the remaining amount is called NNP (Net NationalProduct).
• NNP thus obtained is completely paid out to consumers, consisting ofworkers and shareholders, as wages to workers and dividends to share-holders, including foreign shareholders.
• Foreign consumers are assumed to behave in a similar fashion as a mirrorimage of domestic consumers.
Government
Transactions of the government are illustrated in Figure 35 in the appendix,some of which are summarized as follows.
• Government receives, as tax revenues, income taxes from consumers andcorporate taxes from producers.
• Government spending consists of government expenditures and paymentsto the consumers for its partial debt redemption and interests against itssecurities.
• Government expenditures are assumed to be endogenously determinedby either the growth-dependent expenditures or tax revenue-dependentexpenditures.
• If spending exceeds tax revenues, government has to borrow cash fromconsumers and banks by newly issuing government securities.
• Foreign government is assumed to behave in a similar fashion as a mirrorimage of domestic government.
Banks
Main transactions of banks, which are illustrated in Figure 36 in the appendix,are summarized as follows.
• Banks receive deposits from consumers and consumers abroad as foreigninvestors, against which they pay interests.
• They are obliged to deposit a portion of the deposits as the requiredreserves with the central bank.
• Out of the remaining deposits, loans are made to producers and banksreceive interests to which a prime rate is applied.
• If loanable fund is not enough, banks can borrow from the central bankto which discount rate is applied.
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• Their retained earnings thus become interest receipts from producers lessinterest payment to consumers and to the central bank. Positive earningswill be distributed among bank workers as consumers.
• Banks buy and sell foreign exchange at the request of producers, con-sumers and the central bank.
• Their foreign exchange are held as bank reserves and evaluated in termsof book value. In other words, foreign exchange reserves are not depositedwith foreign banks. Thus net gains realized by the changes in foreignexchange rate become part of their retained earnings (or losses).
• Foreign currency (dollars in our model) is assumed to play a role of keycurrency or vehicle currency. Accordingly foreign banks need not set upforeign exchange account. This is a point where a mirror image of openmacroeconomic symmetry breaks down.
Central Bank
Main transactions of the central bank, which are illustrated in Figure 37 in theappendix, are summarized as follows.
• The central bank issues currencies against the gold deposited by the public.
• It can also issue currency by accepting government securities through openmarket operation, specifically by purchasing government securities fromthe public (consumers) and banks. Moreover, it can issue currency bymaking credit loans to commercial banks. (These activities are sometimescalled money out of nothing.)
• It can similarly withdraw currencies by selling government securities to thepublic (consumers) and banks, and through debt redemption by banks.
• Banks are required by law to reserve a certain amount of deposits withthe central bank. By controlling this required reserve ratio, the centralbank can control the monetary base directly.
• The central bank can additionally control the amount of money supplythrough monetary policies such as open market operations and discountrate.
• Another powerful but hidden control method is through its direct influenceover the amount of credit loans to banks (known as window guidance inJapan.)
• The central bank is allowed to intervene foreign exchange market; that is,it can buy and sell foreign exchange to keep a foreign exchange ratio stable(though this intervention is actually exerted by the Ministry of Finance inJapan, it is regarded as a part of policy by the central bank in our model).
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• Foreign exchange reserves held by the central bank is usually reinvestedwith foreign deposits and foreign government securities, which are, how-ever, not assumed here as inessential.
4 Behaviors of A Debt Money System
Mostly Equilibria in the Real Sector
Our open macroeconomic model is now completely presented. It is a genericmodel, out of which diverse macroeconomic behaviors are generated, dependingon the purpose of simulations. In this paper let us focus on an equilibriumgrowth path as a benchmark for our analysis to follow. An equilibrium state iscalled a full capacity aggregate demand equilibrium if the following three outputand demand levels are met:
Full Capacity GDP = Desired Output = Aggregate Demand (4)
If the economy is not in the equilibrium state, then actual GDP is determinedby
GDP = MIN (Full Capacity GDP, Desired Output ) (5)
In other words, if desired output is greater than full capacity GDP, then actualGDP is constrained by the production capacity, meanwhile in the opposite case,GDP is determined by the amount of desired output which producers wish toproduce, leaving the capacity idle, and workers being laid off.
Even though full capacity GDP is attained, full employment may not berealized unless the following equation is not met;
Potential GDP = Full Capacity GDP. (6)
Does the equilibrium state, then, exist in the sense of full capacity GDP and fullemployment? To answer these questions, let us define GDP gap as a differencebetween potential GDP and actual GDP, and its ratio to the potential GDP as
GDP Gap Ratio =Potential GDP - GDP
Potential GDP(7)
By trial and error, mostly equilibrium states are attained when price elastic-ity e is 3, together with all other adjusted parameters, as illustrated in Figure5.
Our open macrodynamic model has more than 900 variables that are in-terrelated one another, among which, as benchmark variables for comparativeanalyses in this paper, we mainly focus on two variables: GDP gap ratio andunemployment rate. Figure 6 illustrates these two figures at the mostly equi-librium states. GDP gap ratios are maintained below 1% after the year 6, andunemployment ratios are less than 0.65% at their highest around the year 6, ap-proaching to zero; that is, full employment. The reader may wonder why theseare a state of mostly equilibria, because some fluctuations are being observed.
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Potential GDP, GDP and Aggregate Demand
560
420
280
140
0
5 5 5 5 5 5 5 54 4 4 4 4 4 4 4 4
33 3
33 3
33
3
2 22 2
22
22 2
1 1 1 11
11
11
0 5 10 15 20 25 30 35 40 45 50
Time (Year)
Yen
Real/
Year
Potential GDP : Equilibrium (Debt) 1 1 1 1 1 1
"GDP (real)" : Equilibrium (Debt) 2 2 2 2 2 2
"Aggregate Demand (real)" : Equilibrium (Debt) 3 3 3 3 3
"Consumption (real)" : Equilibrium (Debt) 4 4 4 4 4 4
"Investment (real)" : Equilibrium (Debt) 5 5 5 5 5 5
Figure 5: Mostly Equilibrium States
Economic activities are alive like human bodies, whose heart pulse rates, evenof healthy persons, fluctuate between 60 and 70 per minute in average. Yet,they are a normal state. In a similar fashion, it is reasonable to consider thesefluctuations as normal equilibrium states.
GDP Gap Ratio
0.02
0.015
0.01
0.005
00 5 10 15 20 25 30 35 40 45 50
Time (Year)
Dm
nl
GDP Gap Ratio : Equilibrium (Debt)
Unemployment rate
0.008
0.006
0.004
0.002
00 5 10 15 20 25 30 35 40 45 50
Time (Year)
Dm
nl
Unemployment rate : Equilibrium (Debt)
Figure 6: GDP Gap and Unemployment Rate of Mostly Equilibrium States
Money out of Nothing
For the attainment of mostly equilibria, enough amount of money has to beput into circulation to avoid recessions caused by credit crunch as analyzed in[12]. Demand for money mainly comes from banks and producers. Banks areassumed to make loans to producers as much as desired so long as their vaultcash is available. Thus, they are persistently in a state of shortage of cash aswell as producers. In the case of producers, they could borrow enough fund frombanks. From whom, then, should the banks borrow in case of cash shortage?
16
In a closed economic system, money has to be issued or created within thesystem. Under the current financial system of debt money, only the central bankis endowed with a power to issue money within the system, and make loansto the commercial banks directly and to the government indirectly throughthe open market operations. Commercial banks then create credits under afractional reserve banking system by making loans to producers and consumers.These credits constitute a great portion of money supply. In this way, moneyand credits are only crated when commercial banks and government as well asproducers and consumers come to borrow at interest. Under such circumstances,if all debts are repaid, money ceases to exist. This is an essence of a debt moneysystem. The process of creating money is known as money out of nothing.
Figure 7 indicates unconditional amount of annual discount loans and itsgrowth rate by the central bank at the request of desired borrowing by banks.In other words, money has to be incessantly created and put into circulation inorder to sustain an economic growth under mostly equilibrium states. Roughlyspeaking, a growth rate of credit creation by the central bank has to be inaverage equal to or slightly greater than the economic growth rate as suggestedby the right hand diagram of Figure 7, in which line 1 is a growth rate of credit
Lending (Central Bank)
200
150
100
50
00 5 10 15 20 25 30 35 40 45 50
Time (Year)
Yen
/Yea
r
"Lending (Central Bank)" : Equilibrium (Debt)
Growth Rate of Credit
0.6
0.3
0
-0.3
-0.6
2 2 2 2 2 2 2 2 2 2 2 2 2 2 2
1 1
11
1
1
1
11
1 1 1
1 1 1
0 5 10 15 20 25 30 35 40 45 50
Time (Year)
Dm
nl
Growth Rate of Credit : Equilibrium (Debt) 1 1 1 1 1 1 1 1
Growth Rate : Equilibrium (Debt) 2 2 2 2 2 2 2 2 2 2
Figure 7: Lending by the Central Bank and its Growth Rate
and line 2 is an economic growth rate. In this way, the central bank begins toexert an enormous power over the economy through its credit control.
Accumulation of Government Debt
So long as the mostly equilibria are realized in the economy, through monetaryand fiscal policies in the days of recession, no macroeconomic problem seemsto exist. This is a positive side of the Keynesian macroeconomic theory. Yetbehind the full capacity aggregate demand growth path in Figure 5 govern-ment debt continues to accumulate as the line 1 in the left diagram of Figure 8illustrates. This is a negative side of the Keynesian theory. Yet most macroe-conomic textbooks neglect or less emphasize this negative side, partly becausetheir macroeconomic frameworks cannot handle this negative side of the debtmoney system.
In the model here primary balance ratio is initially set to be one and balanced
17
budget is assumed to the effect that government expenditure is set to be equalto tax revenues, and no deficit arises. Why, then, does the government continueto accumulate debt? Government deficit is precisely defined as
Debt (Government)
800
600
400
200
0
33 3 3 3 3 3 3 3 3 3 3 3 3
22 2 2 2 2 2 2 2 2 2 2 2 21
11
11
11
1
11
11
11
1
0 5 10 15 20 25 30 35 40 45 50Time (Year)
Yen
"Debt (Government)" : Equilibrium (Debt) 1 1 1 1 1 1 1 1 1 1"Debt (Government)" : Primary Balance(=90%) 2 2 2 2 2 2 2 2 2"Debt (Government)" : Excise Tax (5+5%) 3 3 3 3 3 3 3 3 3
Debt-GDP ratio
2
1.5
1
0.5
0
3 3 3 3 3 3 3 3 3 3 3 3 3 3
2 2 2 2 2 2 2 2 2 2 2 2 2 2
1 11 1
11
11
11
11
11
1
0 5 10 15 20 25 30 35 40 45 50Time (Year)
Year
"Debt-GDP ratio" : Equilibrium (Debt) 1 1 1 1 1 1 1"Debt-GDP ratio" : Primary Balance(=90%) 2 2 2 2 2 2"Debt-GDP ratio" : Excise Tax (5+5%) 3 3 3 3 3 3 3
Figure 8: Accumulation of Government Debt and Debt-GDP Ratio
Deficit = Tax Revenues - Expenditure - Debt Redemption - Interest (8)
Therefore, even if balanced budget is maintained, government still has to keeppaying its debt redemption and interest. This is why it has to keep borrowingand accumulating its debt; that is to say, it is not balanced in an expanded senseof budget. Initial GDP in the model is attained to be 300, while governmentdebt is initially set to be 200. Hence, the initial debt-GDP ratio is around 0.667year. Yet, the ratio continues to increase to 1.473 year at the year 50 in themodel as illustrated by the line 1 in the right diagram of Figure 8. This impliesthe government debt becomes 1.473 years as high as the annual level of GDP.
Remarks: Even if a debt crisis due to the runaway accumulation of debt failsto be observed in the near future, still there exit some ethical reasons to stopaccumulating debts. First, it continues to create unfair income distribution infavor of creditors, that is, bankers and financial elite, causing inefficient allo-cation of resources and economic performances, and eventually social turmoilsamong the poor. Secondly, obligatory payment of interest forces the indebtedproducers to drive incessant economic growth to the limit of environmental car-rying capacity, which eventually leads to the collapse of environment. In short,a debt money system is unsustainable as a macroeconomic system.
Liquidation Policies of Government Debt
Let us now consider how we could avoid such a debt crisis under the currentdebt money system. At the face of the debt crisis as discussed above, supposethat government is forced to reduce its debt-GDP ratio to less than 0.6 by theyear 50, as currently required to all EU members by the Maastricht treaty.
To attain this goal, though, only two policies are available to the government;that is, to spend less or to tax more. Let us consider them, respectively.
18
Policy A: Spend Less
This policy assumes that the government spend 10% less than its equilibriumtax revenues, so that a primary balance ratio is reduced to 0.9 in our economy.In other words, the government has to make a strong commitment to repay itsdebt annually by the amount of 10 % of its tax revenues. Let us assume thatthis reduction is put into action at the year 6. Line 2 of the left diagram ofFigure 9 illustrates this reduction of spending.
Under such a radical financial reform, debt-GDP ratio will begin to getreduced to around 0.65 at the year 25, as illustrated by line 3 of the samediagram, and to around 0.44 at the year 50, as illustrated by line 2 in the rightdiagram of Figure 8. Accordingly, the accumulation of debt will be eventuallycurved as shown byline 2 in the left diagram of Figure 8.
Government Budget and Debt (Policy A)
120 Yen/Year
400 Yen
80 Yen/Year
200 Yen
40 Yen/Year
0 Yen
33
3 3 3 3 3 3 3 3 3 3 3
2 2 2
2 2 2 2 2 2 2 2 2 2
1 11 1 1 1
1 11 1 1 1 1 1
0 5 10 15 20 25
Time (Year)
Tax Revenues : Primary Balance(=90%) Yen/Year1 1 1 1 1 1 1 1
Government Expenditure : Primary Balance(=90%) Yen/Year2 2 2 2 2 2
"Debt (Government)" : Primary Balance(=90%) Yen3 3 3 3 3 3 3 3
Government Budget and Debt (Policy B)
120 Yen/Year
400 Yen
80 Yen/Year
200 Yen
40 Yen/Year
0 Yen
33
3 3 3 3 3 3 3 3 3 3 3
2 2 2
2 22 2 2
2 2 2 2 2
1 11
1 11
1 1 1 1 11 1 1
0 5 10 15 20 25
Time (Year)
Tax Revenues : Excise Tax (5+5%) Yen/Year1 1 1 1 1 1 1
Government Expenditure : Excise Tax (5+5%) Yen/Year2 2 2 2 2
"Debt (Government)" : Excise Tax (5+5%) Yen3 3 3 3 3 3
Figure 9: Liquidation Policies: Spend Less and Tax More
Policy B: Tax More (and Spend More)
Among various sources of taxes to be levied by the government such as incometax, excise tax, and corporate tax, let us assume here that excise tax is increased,partly because an increase in consumption (or excise) tax has become a hotpolitical issue recently in Japan. Specifically the excise tax is assumed to beincreased to 10% from the initial value of 5% in our model; that is, 5% increase.Line 1 of the right diagram of Figure 9 illustrates the increased tax revenues.
Out of these increased tax revenues, spending is now reduced by 8.5% torepay the accumulated debt. Though spending is reduced in the sense of primarybalance, it has indeed increased in the absolute amount, compared with theoriginal equilibrium spending level, as illustrated by line 2 of the same rightdiagram of Figure 9. Accordingly the government needs not be forced to reducethe equilibrium level of budget.
As a result this policy can also successfully reduces debt as illustrated byline 3 of the same diagram up to the year 25, and further up to the year 50 asillustrated by line 3 in the left diagram of Figure 8.
19
Triggered Recession and Unemployment
These liquidation policies seem to be working well as debt begins to get reduced.However, the implementation of these policies turns out to be very costly to thegovernment and its people as well.
Let us examine the policy A in detail. At the next year of the implementationof 10 % reduction of a primary balance ratio, growth rate is forced to drop tominus 2 %, and the economy fails to sustain its full capacity aggregate demandequilibrium of line 1 as illustrated by line 2 in Figure 10. Compared with themostly equilibrium path of line 1, debt-reducing path of line 2 brings aboutbusiness cycles. Similarly, line 3 indicates another business cycle triggered byPolicy B.
GDP (real)
380
355
330
305
280
33
3 3 33
3
3 3
33 3
33
2 2
2 2 2
22
2 2
22
22
22
1 1
1 1
1
11
1 1
11
1
1
11
0 5 10 15 20 25
Time (Year)
Yen
Rea
l/Y
ear
"GDP (real)" : Equilibrium (Debt) 1 1 1 1 1 1 1 1 1
"GDP (real)" : Primary Balance(=90%) 2 2 2 2 2 2 2 2 2
"GDP (real)" : Excise Tax (5+5%) 3 3 3 3 3 3 3 3 3
Figure 10: Recessions triggered by Debt Liquidation
Figure 11 (lines 2) shows how this policy of debt liquidation triggers GDPgap and unemployment. GDP gap jumps from 0.3% to 3.9% at the year 7, anincrease of 13 times. Unemployment jumps from 0.5% to 4.8% at the year 7,more than 9 times. In similar fashion, lines 3 indicate another gaps triggeredby Policy B.
In the previous paper [16], unemployment was left unanalyzed. In this sense,the result here is a new finding on the effect of debt liquidation under the currentdebt money system. The reader should understand that the absolute number isnot essential here, because our analysis is based on arbitrary numerical values.Instead, comparative changes in factors need be paid more attention.
Figure 12 illustrates how fast wage rate plummets (line 2 in the left diagram)- another finding in this paper. Concurrently inflation rate plunges to -0.98%from -0.16%, close to 6 times drop, that is, the economy becomes deflationary(line 2 in the right diagram). Lines 3, likewise, indicate another behaviors
20
GDP Gap Ratio
0.04
0.03
0.02
0.01
0
3
3
3
3
3 3
3
3
3
3
3
3
3
32
2
2
2
2
22
2
2
2
2
2
2
21
1
1
1
1 1 1 1 1 11 1 1
11
0 5 10 15 20 25Time (Year)
Dm
nl
GDP Gap Ratio : Equilibrium (Debt) 1 1 1 1 1 1 1 1GDP Gap Ratio : Primary Balance(=90%) 2 2 2 2 2 2 2GDP Gap Ratio : Excise Tax (5+5%) 3 3 3 3 3 3 3 3
Unemployment rate
0.08
0.06
0.04
0.02
03
3 3
3
3 3
3
3
3
3
33 3
32
22
2
2
2
2
2
2
22
2 2 21 11
11 1 1 1 1 1 1 1 1 1 1
0 5 10 15 20 25Time (Year)
Dm
nl
Unemployment rate : Equilibrium (Debt) 1 1 1 1 1 1 1Unemployment rate : Primary Balance(=90%) 2 2 2 2 2 2Unemployment rate : Excise Tax (5+5%) 3 3 3 3 3 3 3
Figure 11: GDP Gap and Unemployment
triggered by Policy B.
Wage Rate
2.4
2.25
2.1
1.95
1.8
3 33
3
33
3 3 3 33 3 3 3
2 22 2
22
2 2 22 2 2
22 2
11 1 1 1 1 1 1 1 1 1 1 1 1
1
0 5 10 15 20 25
Time (Year)
Yen
/(Y
ear*
Per
son
)
Wage Rate : Equilibrium (Debt) 1 1 1 1 1 1 1 1 1 1
Wage Rate : Primary Balance(=90%) 2 2 2 2 2 2 2 2 2
Wage Rate : Excise Tax (5+5%) 3 3 3 3 3 3 3 3 3
Inflation Rate
0.02
0.01
0
-0.01
-0.02
3
3
3
3
3
3
3
3
3
3
3
33
3
2
2
2
2
2
2
2
2
2
2
22 2
21
11
1
1 1 1 11 1
1 1 1 1 1
0 5 10 15 20 25
Time (Year)
1/Y
ear
Inflation Rate : Equilibrium (Debt) 1 1 1 1 1 1 1 1 1
Inflation Rate : Primary Balance(=90%) 2 2 2 2 2 2 2 2 2
Inflation Rate : Excise Tax (5+5%) 3 3 3 3 3 3 3 3 3
Figure 12: Wage Rate and Inflation
These recessionary effects triggered by the liquidation of debt turn out tocross over a national border and become contagious to foreign countries. Figure13 illustrates how GDP gap and unemployment in a foreign country get worsenedby the domestic liquidation policy A (lines 2) and policy B (lines 3). Thesecontagious effects under open macroeconomies are observed for the first time inour expanded macroeconomic model - the third finding in this paper. In thissense, in a global world economy, no country can be free from a contagious effectof recessions caused by the debt liquidation policy in other country.
GDP Gap Ratio.f
0.02
0.015
0.01
0.005
0
3 3
3
33 3
3
3
3
3
3
3
3 3
2
2
2 2
22
2
2
2
2
2
2
2
2
1
1
1
1
1 1 1 1 1 1
1
1
1
1
1
0 5 10 15 20 25
Time (Year)
Dm
nl
"GDP Gap Ratio.f" : Equilibrium (Debt) 1 1 1 1 1 1 1 1
"GDP Gap Ratio.f" : Primary Balance(=90%) 2 2 2 2 2 2 2
"GDP Gap Ratio.f" : Excise Tax (5+5%) 3 3 3 3 3 3 3 3
Unemployment rate.f
0.01
0.0075
0.005
0.0025
03
3 3
3
33 3 3
33
3
332
2
2
2
22
2
2
2
2
2
2
2 21 11
1
1
1 1 1 1 1 1 1 1 10 5 10 15 20 25
Time (Year)
Dm
nl
"Unemployment rate.f" : Equilibrium (Debt) 1 1 1 1 1 1 1 1 1"Unemployment rate.f" : Primary Balance(=90%) 2 2 2 2 2 2 2 2 2"Unemployment rate.f" : Excise Tax (5+5%) 3 3 3 3 3 3 3 3 3
Figure 13: Foreign Recessions Contagiously Triggered
21
Liquidation Traps of Government Debt
Under a debt money system, liquidation policy of government dept will beeventually captured into a liquidation trap as follows. The liquidation policyis only implemented with the reduction of budget deficit by spending less orlevying tax; that is; policy A or B in our case. Whichever policy is taken, itcauses an economic recession as analyzed above.
Tax Revenues (Policy A)
65
61.25
57.5
53.75
50
22
2 2
2 2
22
2
22
2 2
2
11
1 1
11
1
1
11
1
11
11
0 5 10 15 20 25
Time (Year)
Yen
/Yea
r
Tax Revenues : Equilibrium (Debt) 1 1 1 1 1 1 1 1 1
Tax Revenues : Primary Balance(=90%) 2 2 2 2 2 2 2 2
Tax Revenues (Policy B)
80
72.5
65
57.5
502 2
2
22
22
2 2
2 22
22 2
1 1
1
11
11
11
11
1 11
1
0 5 10 15 20 25
Time (Year)
Yen
/Yea
rTax Revenues : Excise Tax (5+5%) Only 1 1 1 1 1 1 1 1
Tax Revenues : Excise Tax (5+5%) 2 2 2 2 2 2 2 2 2
Figure 14: Liquidation Traps of Debt
The immediate effects of recession either by policy A or B are the reduction oftax revenues as illustrated by lines 2 in Figure 14. Eventually revenue reductionwill worsen budget deficit. In other words, policies to reduce deficit result in anincrease in deficit. This constitutes a typical balancing feedback loop, which isillustrated as “Revenues Crisis” loop in Figure 15.
The other effect of recession will be a forced bailout/stimulus package bythe government, which in turn increases government expenditures, worseningbudget deficit again. This adds up a second balancing feedback loop, which isillustrated as “Spending Crisis” loop in Figure 15.
Budget
Deficit
Tax
Revenues
Government
Expenditures
-
+
Bailout /
Stimulus
Packages
+
Normal
Spending+
Recession
-+
-Revenues Crisis
Spending Crisis
Figure 15: Causal Loop Diagram of Liquidation Traps of Debt
In this way the liquidation policies of government debt are retarded by two
22
balancing feedback loops of revenues crisis and spending crisis, making up liq-uidation traps of government debt. This indicates that the debt money systemcombined with the traditional Keynesian fiscal policy becomes a dead end as amacroeconomic monetary system.
5 Modeling A Public Money System
We are now in a position to implement the alternative macroeconomic systemdiscussed in the introduction, as proposed by the American Monetary Act, inwhich central bank is incorporated into a branch of government and a fractionalreserve banking system is abolished. Let us call this new system a public moneysystem of open macroeconomies. Money issued under this new system plays arole of public utility of medium of exchange. Hence the newly incorporated in-stitution may be appropriately called the Public Money Administration (PMA)in this paper.
Under the new system, transactions of only government, commercial banksand the public money administration (formally the central bank) need be revisedslightly. All domestic models of a public money system of open macroeconomiesas well as foreign exchange and balance of payment are supplemented to the ap-pendix of this paper. Let us start with the description of the revised transactionsof the government.
Government
• Balanced budget is assumed to be maintained; that is, a primary balanceratio is unitary. Yet the government may still incur deficit due to the debtredemption and interest payment.
• Government now has the right to newly issue money whenever its deficitneeds to be funded. The newly issued money becomes seigniorage inflowof the government into its equity or retained earnings account.
• The newly issued money is simultaneously deposited with the reserve ac-count of the Public Money Administration. It is also booked to its depositsaccount of the government assets.
• Government could further issue money to fill in GDP gap.
Revised transaction of the government is illustrated in Figure 35 in the appendix,where green stock box of deposits is newly added to the assets.
Banks
Revised transactions of commercial banks are summarized as follows.
• Banks are now obliged to deposit a 100% fraction of the deposits as therequired reserves with the public money administration. Time depositsare excluded from this obligation.
23
• When the amount of time deposits is not enough to meet the demandfor loans from producers, banks are allowed to borrow from the publicmoney administration free of interest; that is, former discount rate is nowzero. Allocation of loans to the banks will be prioritized according tothe public policies of the government. (This constitutes a market-orientedissue of new money. Alternatively, the government can also issue newmoney directly through its public policies to fill in GDP gap as alreadydiscussed above.)
Required Reserve Ratio
1
0.75
0.5
0.25
0 4 4
4
4
4
4
4 4 4 4
3 3 3
3
3 3 3 3 3 3 3
2 2 2
2 2 2 2 2 2 2 2
1 1 1 1 1 1 1 1 1 1 1
0 5 10 15 20 25Time (Year)
Dm
nl
Required Reserve Ratio : Equilibrium (Debt) 1 1 1 1 1 1 1Required Reserve Ratio : Public Money (100% 1 Yr) 2 2 2 2 2 2 2Required Reserve Ratio : Public Money (100% 5 Yr) 3 3 3 3 3 3Required Reserve Ratio : Public Money (100% 10 Yr) 4 4 4 4 4 4
Figure 16: Required Reserve Ratios
Line 1 in Figure 16 illustrates theinitial required reserve ratio of 5%in our model. We have here as-sumed three different ways of abolish-ing a fractional reserve banking sys-tem. Line 2 shows that a 100% frac-tion is immediately attained in thefollowing year of its implementation,while line 3 illustrates it is attainedin 5 years. Line 4 indicates it is grad-ually attained in 10 years, startingfrom the year 6. In our analysis be-low, 100% fraction will be assumed tobe attained in 5 years as a represen-tative illustration of fractional behaviors.
Public Money Administration (Formerly Central Bank)
The central bank is now incorporated as one of the governmental organizationswhich is here called the Public Money Administration (PMA). Its revised trans-actions become as follows.
• The PMA accepts newly issued money of the government as seigniorageassets and enter the same amount into the government reserve account.Under this transaction, the government needs not print hard currency,instead it only sends digital figures of the new money to the PMA.
• When the government want to withdraw money from their reserve ac-counts at the PMA, the PMA could issue new money according to therequested amount. In this way, for a time being, former central banknotes and government money coexist in the market.
• With the new issue of money the PMA meets the demand for money bycommercial banks, free of interest, according to the guideline set by thegovernment public policies.
Under the revised transactions, open market operations of sales and pur-chases of government securities become ineffective, simply because government
24
debt gradually diminishes to zero. Furthermore, discount loan is replaced withinterest-free loan. This lending procedure becomes a sort of open and publicwindow guidance, which once led to the rapid economic growth after world warII in Japan [7]. Accordingly, interest incomes from discount loans and govern-ment securities are reduced to be zero eventually. Transactions of the publicmoney administration are illustrated in Figure 37 in the appendix, with greenstock boxes of seigniorage assets and government reserves being added.
6 Behaviors of A Public Money System
Liquidation of Government Debt
Under the public money system of open macroeconomies, the accumulated debtof the government gets gradually liquidated as demonstrated by line 4 in theleft diagram of Figure 17, which is the same as the left diagram of Figure 8except the line 4. Recollect that line 1 is a benchmark debt accumulation of
Debt (Government)
800
600
400
200
0
4
4
4
44 4 4 4 4 4
33 3 3 3 3 3 3 3 3 3
22 2 2 2 2 2 2 2 2 21
11
11
1
11
1
1
1
0 5 10 15 20 25 30 35 40 45 50Time (Year)
Yen
"Debt (Government)" : Equilibrium (Debt) 1 1 1 1 1 1 1"Debt (Government)" : Primary Balance(=90%) 2 2 2 2 2 2 2"Debt (Government)" : Excise Tax (5+5%) 3 3 3 3 3 3 3"Debt (Government)" : Public Money (100% 5 Yr) 4 4 4 4 4 4
Debt-GDP ratio
2
1.5
1
0.5
0
4
4
4
44 4 4 4 4 4
33 3
3 3 3 3 3 3 3 3
22 2
2 2 2 2 2 22 2
11
11
11
11
11
1
0 5 10 15 20 25 30 35 40 45 50Time (Year)
Yea
r
"Debt-GDP ratio" : Equilibrium (Debt) 1 1 1 1 1 1 1 1"Debt-GDP ratio" : Primary Balance(=90%) 2 2 2 2 2 2 2 2"Debt-GDP ratio" : Excise Tax (5+5%) 3 3 3 3 3 3 3"Debt-GDP ratio" : Public Money (100% 5 Yr) 4 4 4 4 4 4 4
Figure 17: Liquidation of Government Debt and Debt-GDP Ratio
the mostly equilibria under the debt money system, while lines 2 and 3 are thedecreasing debt lines when debt-ratio are reduced under the same system. Nownewly added line 4 indicates that the government debt continues to decline whena 100% fraction ratio is applied in 5 years, starting at the year 6. The othertwo cases of attaining the 100% fractional reserve discussed above, that is, in ayear or 10 years, reduce the debts exactly in a similar fashion. This means thatthe abolishment period of a fractional level does not affect the liquidation of thegovernment debt, because banks are allowed to fill in the sufficient amount ofcash shortage by borrowing from the PMA in the model.
It is shown in Figure 18 that the liquidation of government debt (line 4) isperformed without triggering economic recession contrary to the case of debtmoney system (lines 2 and 3). To observe these comparisons in detail, let usillustrate GDP gap ratios and unemployment rates in Figure 19, in which thesame line numbers apply as in the above figures. The liquidation of govern-ment debt under the public money system (line 4) can be said to be far betterperformed than the current debt system because of its accomplishment withoutrecession and unemployment.
25
GDP (real)
380
355
330
305
280
4
44
44
4
44
4
4
4
3
3 3 33
33
3 3
33
2 2
2 2
2
2 2
2 2
2
2
1 1
11
11
1
1
1
1
1
0 5 10 15 20 25
Time (Year)
Yen
Rea
l/Y
ear
"GDP (real)" : Equilibrium (Debt) 1 1 1 1 1 1 1
"GDP (real)" : Primary Balance(=90%) 2 2 2 2 2 2 2
"GDP (real)" : Excise Tax (5+5%) 3 3 3 3 3 3 3
"GDP (real)" : Public Money (100% 5 Yr) 4 4 4 4 4 4
Figure 18: No Recessions Triggered by A Public Money System
GDP Gap Ratio
0.04
0.03
0.02
0.01
0
4
44
44
4 44
44
3
3
3
3 3
3
3
3 3
3
32
2
2
2
2
2
2
2
2
2
2
1
1
1
1 1 1 1 11 1
10 5 10 15 20 25
Time (Year)
Dm
nl
GDP Gap Ratio : Equilibrium (Debt) 1 1 1 1 1 1GDP Gap Ratio : Primary Balance(=90%) 2 2 2 2 2GDP Gap Ratio : Excise Tax (5+5%) 3 3 3 3 3 3GDP Gap Ratio : Public Money (100% 5 Yr) 4 4 4 4 4
Unemployment rate
0.08
0.06
0.04
0.02
04 4
44 4 4 4 4 4 43
33
3 3
3
3
33 3
32
22
2
2
2 2
2 22 21
11 1
1 1 1 1 1 1 10 5 10 15 20 25
Time (Year)
Dm
nl
Unemployment rate : Equilibrium (Debt) 1 1 1 1 1 1 1 1Unemployment rate : Primary Balance(=90%) 2 2 2 2 2 2 2Unemployment rate : Excise Tax (5+5%) 3 3 3 3 3 3 3Unemployment rate : Public Money (100% 5 Yr) 4 4 4 4 4 4 4
Figure 19: GDP Gap and Unemployment
Wage Rate
2.4
2.25
2.1
1.95
1.8
4 4 4 4 4 4 4 4 4 4 4
3 3 3
3
33 3
3 33 3
2 2 2
22
2 22 2
22
1 11 1
1 1 1 1 1 1 1
0 5 10 15 20 25
Time (Year)
Yen
/(Y
ear*
Per
son
)
Wage Rate : Equilibrium (Debt) 1 1 1 1 1 1 1
Wage Rate : Primary Balance(=90%) 2 2 2 2 2 2 2
Wage Rate : Excise Tax (5+5%) 3 3 3 3 3 3 3
Wage Rate : Public Money (100% 5 Yr) 4 4 4 4 4 4
Inflation Rate
0.02
0.01
0
-0.01
-0.02
4 4
44
44 4 4 4 43
3
3
3
3
3
3
3
33
2
22
2
2
2
2
2
2 2 2
1
1
1 1 11
1 11 1 1
0 5 10 15 20 25Time (Year)
1/Y
ear
Inflation Rate : Equilibrium (Debt) 1 1 1 1 1 1Inflation Rate : Primary Balance(=90%) 2 2 2 2 2Inflation Rate : Excise Tax (5+5%) 3 3 3 3 3 3Inflation Rate : Public Money (100% 5 Yr) 4 4 4 4 4
Figure 20: Wage Rate and Inflation
Moreover, Figure 20 illustrates that wage rate and inflation rates (lines 4)stay closer to the rates of mostly equilibria. Accordingly, the liquidation of debtunder the public money system can be said to be attained without reducing
26
wage rate and setting off inflation.Furthermore, the liquidation of debt under the public money system is not
contagious to foreign countries as illustrated by lines 4 in Figure 21. That is,GDP gap and unemployment in a foreign country (lines 4) remain closer to theiralmost equilibria states (lines 1).
GDP Gap Ratio.f
0.02
0.015
0.01
0.005
0
4
4
44 4 4
4
4
4
4
3
3 33
3
3
3
3
3
3
2 2
2
2
2
22
2
22
2
1
1
1
1 1 1 1 1
1
1 1
0 5 10 15 20 25Time (Year)
Dm
nl
"GDP Gap Ratio.f" : Equilibrium (Debt) 1 1 1 1 1 1 1 1"GDP Gap Ratio.f" : Primary Balance(=90%) 2 2 2 2 2 2 2"GDP Gap Ratio.f" : Excise Tax (5+5%) 3 3 3 3 3 3 3"GDP Gap Ratio.f" : Public Money (100% 5 Yr) 4 4 4 4 4 4 4
Unemployment rate.f
0.01
0.0075
0.005
0.0025
04 4
4
4 4 4 4 4 4 433
3
33 3
33
3
322
2
2
2
2
2
22
21
11
1
1 1 1 1 1 1 10 5 10 15 20 25
Time (Year)
Dm
nl
"Unemployment rate.f" : Equilibrium (Debt) 1 1 1 1 1 1 1"Unemployment rate.f" : Primary Balance(=90%) 2 2 2 2 2 2 2"Unemployment rate.f" : Excise Tax (5+5%) 3 3 3 3 3 3 3"Unemployment rate.f" : Public Money (100% 5 Yr) 4 4 4 4 4 4
Figure 21: Foreign Recessions are Not Triggered
Debt Crises can be Subdued!
In sum, the pubic money system is, from the results of the above analyses,demonstrated as a superior alternative system for liquidating government debtin a sense that its implementation does not trigger recessions and unemploymentboth in domestic and foreign economies. In other words, looming debt crisescaused by the accumulation of government debt under a current debt moneysystem can be thoroughly subdued without causing recessions, unemployment,inflation, and contagious recessions in a foreign economy.
7 Public Money Policies
The role of a newly established public money administration under a publicmoney system is to maintain a monetary value, similar to the role assigned tothe central banks under the debt money system. Keynesian monetary policyunder the debt money system controls money supply indirectly through the ma-nipulation of required reserve ratio, discount ratio, and open market operations.Accordingly its effect is after all limited, as demonstrated by a failure of stim-ulating the prolonged recessions in Japan during 1990s through 2000s with theadjustment of the interest rates, specifically with zero interest rate policies.
Compared with these ineffective Keynesian monetary and fiscal policies, pub-lic money policies we have introduced here are simpler and more direct; that is,they are made up of the management of the amount of public money in circula-tion through governmental spending and tax policies. Interest rate is no longerused by the public money administration as a policy instrument and left to bedetermined in the market.
27
Inflation
Step down of
the PMA Head
Anti-Inflation Policy
Maximal
Inflation
Tolerable
Gap
+-Public
Money
+
Budgetary
Restructure
-
+
-
+ Step Down
Potential
GDP GDP
GDPGap
-+
+
+Anti-Recession Policy
Figure 22: Public Money Policies
More specifically, our public money policies consist of three balancing feed-back loops as shown in Figure 22. Anti-recession policy is taken in the case ofeconomic recession to fill in a GDP gap; that is, government spends more thantax revenues by newly issuing public money. On the other hand, in the case ofinflationary state, anti-inflation policy of managing public money is conductedsuch that public money in circulation is sucked back by raising taxes or cuttinggovernment spending. As a supplement to this policy in the case of an unusu-ally higher inflation rate that is overshooting a maximum tolerable level, a stepdown policy of budgetary restructure will be carried out so that a head of thepublic monetary administration is forced to resign for his or her mismanagementof holding a value of public money.
Recession
Let us now examine in detail how anti-recession policy help restore the economy.For this purpose a recession or GDP gap is purposefully produced by changingthe value of Normal Inventory Coverage from 0.1 to 0.5 months and OutputRatio Elasticity (Effect on Price) from 3 to 1, as illustrated in the left diagramof Figure 23.
To fill a GDP gap under such a recessionary situation, let us continue tonewly issue public money by the amount of 5 annually for 20 years, startingat t=7. The right diagram of Figure 23 confirms that the GDP gap now getscompletely filled in. More specifically, Figure 24 demonstrates how GDP gapratio and unemployment rate caused by this recession (lines 1) are recovered bythe public money policy as illustrated by lines 2.
28
GDP Gap
380
360
340
320
300 2 2
22
2
22
22
2
22
22
2
11
1
11
11
11
1
11
1
11
0 5 10 15 20 25
Time (Year)
Yen
Rea
l/Y
ear
Potential GDP : GDP Gap 1 1 1 1 1 1 1 1 1 1 1
"GDP (real)" : GDP Gap 2 2 2 2 2 2 2 2 2 2 2
GDP Gap
380
360
340
320
300 22
2
2
2
22
2
22
2
2
22
2
11
1
11
1
1
11
1
11
1
11
0 5 10 15 20 25
Time (Year)
Yen
Rea
l/Y
ear
Potential GDP : Public Money Policy 1 1 1 1 1 1 1 1 1
"GDP (real)" : Public Money Policy 2 2 2 2 2 2 2 2 2
Figure 23: GDP Gap and Its Public Money Policy
GDP Gap Ratio
0.04
0.03
0.02
0.01
02
2
2
2
2 2 2 2 2 2
2
22 21 1
1
1
1
1
1
1
1
1 1
1
11
1
0 5 10 15 20 25Time (Year)
Dm
nl
GDP Gap Ratio : GDP Gap 1 1 1 1 1 1 1 1
GDP Gap Ratio : Public Money Policy 2 2 2 2 2 2
Unemployment rate
0.04
0.03
0.02
0.01
02
2
2
2
22 2 2 2 2
2
2
221 1
1
1
1
1
1
1
1
1 1
1
11 1
0 5 10 15 20 25Time (Year)
Dm
nl
Unemployment rate : GDP Gap 1 1 1 1 1 1 1 1 1 1Unemployment rate : Public Money Policy 2 2 2 2 2 2
Figure 24: GDP Gap and Unemployment Recovered
Inflation
As shown above, so long as a GDP gap exists, an increase in the governmentexpenditure by newly issuing public money can restore the equilibrium by stim-ulating the economic growth. Yet, this money policy does not trigger a pricehike and inflation as illustrated by lines 2 in Figure 25 in comparison with lines1 of GDP gap.
Yet, inflation could occur if government happens to mismanage the amountof public money. To examine the case, let us take a benchmark equilibriumstate attained by the public money policy as above (lines 2), then assume thatthe government overly increases public money to 15 instead of 5 at t=7 for25 years in the above case. This corresponds to a continual inflow of moneyinto circulation. Under such situations, Figure 25 shows how price goes up andinflation rate jumps to 1.3% (line 3) from the level of 0.3% attained by thepublic money policy (line 2), 4 times hike, at the year 9.
The inflation thus caused by the excessive supply of money also triggers aGDP gap of 5% at the year 12 (or -3.1% of economic growth or recession), andan unemployment rate of 7.7% at the year 13 as illustrated by lines 3 in Figure26.
Persistent objection to the public money system has been that government,once a free-hand power of issuing money is being endowed, tends to issue moremoney than necessary, which tends to bring about inflation eventually, though
29
Price
1.048
1.034
1.020
1.006
0.9916
3
33
3
3
3
3
33
3 3 3 3
2 2
22
22
22
2 2 2 2 2 2
11
1 1 11
11 1 1 1 1 1 1
0 5 10 15 20 25Time (Year)
Yen
/Yen
Rea
l
Price : GDP Gap 1 1 1 1 1 1 1 1 1 1
Price : Public Money Policy 2 2 2 2 2 2 2 2
Price : Inflation 3 3 3 3 3 3 3 3 3 3 3
Inflation Rate
0.02
0.014
0.008
0.002
-0.004
3
3
3
3
3
3
3
3
3
3
33 3
2
22
2
22
2 2 22
22 2 2
1 1
1
1
1
1
11
11 1 1 1 1
0 5 10 15 20 25Time (Year)
1/Y
ear
Inflation Rate : GDP Gap 1 1 1 1 1 1 1 1
Inflation Rate : Public Money Policy 2 2 2 2 2 2
Inflation Rate : Inflation 3 3 3 3 3 3 3 3
Figure 25: Price and Inflation Rate
GDP Gap Ratio
0.06
0.045
0.03
0.015
03
3
3
33
3
3
3
3
3
3 33
32
2
2
22 2 2 2 2 2
2
22 21 1
1
1
1
1
11
1
1
11
11
0 5 10 15 20 25Time (Year)
Dm
nl
GDP Gap Ratio : GDP Gap 1 1 1 1 1 1 1 1
GDP Gap Ratio : Public Money Policy 2 2 2 2 2 2
GDP Gap Ratio : Inflation 3 3 3 3 3 3 3 3 3
Unemployment rate
0.08
0.06
0.04
0.02
03
3
3
33
3
3
3
3
3
3
33 32
2
2
2
2 2 2 2 2 2
22
2 21 1
1
1
1
1
1
11
1 1
1
1 1 10 5 10 15 20 25
Time (Year)
Dm
nl
Unemployment rate : GDP Gap 1 1 1 1 1 1 1 1 1 1Unemployment rate : Public Money Policy 2 2 2 2 2 2Unemployment rate : Inflation 3 3 3 3 3 3 3 3 3
Figure 26: GDP Gap and Unemployment
history shows the opposite [17]. The above case could be unfortunately onesuch example. With the introduction of anti-inflationary policy, however, thistype of inflation can be easily curbed by the decrease in public money. Letus define maximal inflation as a maximum tolerable inflation rate set by thegovernment. For instance, it was set to be 8% in [16], as suggested by theAmerican Monetary Act. Then, anti-inflationary policy works such that if aninflation rate approaches to the maximal level and a tolerable gap decreases tozero, the amount of public money will be reduced to curb the inflation throughthe decrease in government spendings and/or the increase in taxes.
Step Down
What will happen if the tolerable gap becomes negative; that is, current in-flation rate becomes higher than the maximal inflation? This could occur, forinstance, when the incumbent government tries to cling to the power by unnec-essarily stimulating the economy in the years of election as history demonstrates.Business cycle thus spawned is called political business cycle. “There is someevidence that such a political business cycle exits in the United States, and theFederal Reserve under the control of Congress or the president might make thecycle even more pronounced [6, p.353].” Indeed Figure 27, obtained from theabove analysis of inflation, shows how business cycles could be caused by themismanagement of the increase in public money (line 3) when no GDP gap ex-
30
ists (line 2). This could be a serious moral hazard lying under the public moneysystem.
GDP (real)
364
348
332
316
3003
3
3
3
33
3
3
3 3
3
3
3
3
22
2
2
2
22
2
22
2
2
22
2
1 1
1 1
1
1
1
11
1
11
1
11
0 5 10 15 20 25
Time (Year)
Yen
Rea
l/Y
ear
"GDP (real)" : Equilibrium (Debt) 1 1 1 1 1 1 1 1 1
"GDP (real)" : Public Money Policy 2 2 2 2 2 2 2 2 2
"GDP (real)" : Inflation 3 3 3 3 3 3 3 3 3 3 3
Figure 27: Business Cycles caused by Inflation under No GDP Gap
Proponents of the central bank may take advantage of this cycle as an excusefor establishing the independence of the central bank from the intervention bythe government. How can we avoid the political business cycle, then, withoutresorting to the independence of the central bank? As a system dynamics re-searcher, I suggest an introduction of the third balancing feedback loop of StepDown as illustrated in Figure 22. This loop forces, by law, a head of the PublicMoney Administration to step down in case a tolerable gap becomes negative;that is, an inflation rate gets higher than its maximum tolerable rate. Then anewly appointed head is obliged to restructure a budgetary spending policy tostabilize a monetary value. The stability of a public money system depends onthe legalization of a forced step down of the head of the public money adminis-tration.
Conclusion
Money is, by Aristotle (384 - 322 BC), fiat money as legal tender and has beenhistorically created either as public money or debt money. Current macroe-conomies in many countries are built on a debt money system, which, however,failed to create enough amount of money to meet an increasing demand forgrowing transactions. Gold standard failed in 1930s and was replaced withgold-dollar standard after World War II, which alas failed in 1971. Then cur-rent dollar standard was established, allowing free hand of creating money bycentral banks, from which, unfortunately, current runaway government debt has
31
been derived. The accumulation of debt will sooner or later lead to impassesof defaults, financial meltdown or hyper-inflation; in other words current debtmoney system is facing its systemic failure.
Under such circumstances it is shown that it becomes very costly to save thecurrent debt money system by reducing government debt and debt-GDP ratio;that is, a liquidation process of debt inevitably triggers economic recessions andunemployment of both domestic and foreign economies.
An alternative system, then, is presented as a public money system of openmacroeconomies as proposed by the American Monetary Act in which onlygovernment can issue money with a full reserve banking system. It is shownthat under the public money system government debt can be liquidated withouttriggering recession, unemployment and inflation.
Finally, in place of the current Keynesian monetary and fiscal policies, publicmoney policies are introduced, consisting of three balancing feedback loops ofanti-recession policy, anti-inflation policy and restructuring policy of step downof a head of PMA (Public Money Administration). Public money policies thusbecome simpler and can affect directly to the workings of the economy.
Accordingly, from a viewpoint of system design, a public money systemof macroeconomies as proposed by the American Monetary Act seems to beworth being implemented if we wish to avoid impasses such as defaults, financialmeltdown and hyper-inflation. 8.
8This implementation might bring about fortunate by-products. A debt money system ofthe current macroeconomy has been pointed out to constitute a root cause of unfair incomedistribution between haves and haves-not, wars due to recessions, and environmental destruc-tion due to a forced economic growth to pay interest on debt. Accordingly, a public moneysystem remove the root cause of these problems and could be panacea for solving them. Dueto the limited space, further examination will be left to the reader
32
Appendix: MacroDynamics 2.5 Illustrated9
Overview
GDP
Producer
Consumer
Banks
GDP
Simulation
Interest, Price
& Wage
Government
Fiscal Policy
Monetary
Policy
Public MoneyAdministration(Central Bank)
Population
Labor Force
(C) Prof. KaoruYamaguchi, Ph.D.
Doshisha Business SchoolKyoto, Japan
Currency
Circulation
B/S
Check
GDP.f
Producer.f
Consumer.f
Banks.f
GDP
Simulation.f
Interest, Price
& Wage.f
Government.f
Fiscal Policy.f
Monetary
Policy.f
Public MoneyAdministration.f(Central Bank.f)
B/S C
heck.f
Population
Labor Force.f
Currency
Circulation.f
Foreign
Exchange RateBalance of
Payments
Trade & Investment Abroad
Simulation
Title
Economic
IndicatorsEconomic
Indicators.f
Macroeconomic Dynamics Model
of A Public Money System
- Accounting System Dynamics Approach -
Porf. Kaoru Yamaguchi, Ph.D.
Doshisha Business School Doshisha University
Kyoto, Japan
(c) All Rights Reserved, June 2011
< MacroDynamics 2.5 >
This model provides a generic system on which
various schools of economic thoughts can be built.
Your comments and suggestions are most welcome.
Figure 28: Title Page of the MacroDynamics Model
9In this illustrated section of the model, only domestic macroeconomy is presented. Themodel called MacroDynamics version 2.5 is available through the author.
33
Ove
rvie
w
GD
P
Pro
duc
er
Cons
umer
Ban
ks
GD
P
Sim
ulat
ion
Inte
rest
, P
rice
& W
age
Gove
rnm
ent
Fis
cal P
olic
y
Mo
neta
ry
Polic
y
Pub
lic M
one
yA
dm
inis
trat
ion
(Cen
tral
Ban
k)
Pop
ulat
ion
Lab
or
Fo
rce
(C)
Pro
f. K
aoru
Yam
agu
chi,
Ph
.D.
Do
shis
ha
Bu
sin
ess
Sch
ool
Kyo
to,
Ja
pa
n
Cur
renc
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Cir
cula
tion
B/S
Che
ck
GD
P.f
Pro
duc
er.f
Co
nsum
er.f
Ban
ks.
f
GD
P
Sim
ulat
ion.
f
Inte
rest
, P
rice
& W
age.
f
Go
vern
men
t.f
Fis
cal P
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y.f
Mo
neta
ry
Polic
y.f
Pub
lic M
one
yA
dm
inis
trat
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f(C
entr
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ank
.f)
B/S
C
heck
.f
Po
pul
atio
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Lab
or
Fo
rce.
f
Cur
renc
y
Cir
cula
tion.
f
Fore
ign
Exc
hang
e R
ate
Bal
ance
of
Pay
men
ts
Tra
de
& I
nves
tmen
t A
bro
ad
Sim
ulat
ion
Titl
e
Eco
nom
ic
Indic
ato
rsE
cono
mic
Indic
ato
rs.f
Macro
econ
om
ic S
yst
em
Mo
deli
ng O
vervie
w
Co
nsu
mer
(Ho
use
ho
ld)
Pro
du
cer
(Fir
m)
Ba
nk
s
Pu
blic M
on
ey
Ad
min
istr
ati
on
Go
vern
men
t
Na
tio
nal
Wea
lth
(Cap
ita
lA
ccu
mu
lati
on
)
Gro
ssD
om
esti
cP
rod
uct
s(G
DP
)
Lab
or
& C
apita
l
Wag
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Div
iden
s (I
ncom
e)
Sav
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Loan
Inve
stm
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(PP
&E
)
Inve
stm
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(Hous
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(Pub
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Fac
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Inco
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Tax
Co
rpo
rate
Tax
Co
nsum
ptio
n
Pub
lic S
ervi
ces
Pub
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ervi
ces
Mo
ney
Sup
ply
Exp
ort
Impo
rt
Pro
duc
tion
Po
pu
lati
on
/ L
ab
or
Fo
rce
Ma
croecon
om
ic S
yst
em
Mod
eli
ng O
vervie
w (
Foreig
n C
ou
ntr
y)
Co
nsu
mer
(Ho
use
ho
ld).
f
Pro
du
cer
(Fir
m).
f
Ba
nk
s.f
Pu
blic M
on
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Ad
min
istr
ati
on
.f
Go
vern
men
t.f
Nati
on
al
Wea
lth
(Cap
ital
Acc
um
ula
tio
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Gro
ssD
om
esti
cP
rod
uct
s(G
DP
).f
Lab
or
& C
apita
l
Wag
es &
Div
iden
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nco
me)
Sav
ing
Lo
an
Inve
stm
ent
(PP
&E
)
Inve
stm
ent
(Ho
usin
g)
Inve
stm
ent
(Pub
lic
Fac
ilitie
s)
Inco
me
Tax
Co
rpo
rate
Tax
Co
nsum
ptio
n
Pub
lic S
ervi
ces
Pub
lic S
ervi
ces
Mo
ney
Sup
ply
Pro
duc
tion
Po
pu
lati
on
/ L
ab
or
Fo
rce.f
Dir
ect
and F
inan
cial
Inve
stm
ent
Abro
ad
Figure 29: Model Overview
34
Pop
ulat
ion
0 T
o 1
4
dea
ths
15
to
44
initi
alpo
pul
atio
n0 t
o 1
4
Pop
ulat
ion
15
To 4
4
initi
alp
op
ulat
ion
15
to
44
Po
pul
atio
n
45
To
64
repro
duc
tive
lifet
ime
initi
alp
op
ulat
ion
45
to
64
Po
pul
atio
n
65
Plu
s
initi
alp
op
ulat
ion
65
plu
s
mat
urat
ion
44
to
45
mo
rtal
ity
0 t
o 1
4m
ort
ality
15
to
44
bir
ths
mat
urat
ion
14
to 1
5d
eath
s
0 t
o 1
4d
eath
s 45
to 6
4
dea
ths
65
plu
s
mort
ality
45
to
64
mort
ality
65 p
lus
Po
pul
atio
n
tota
l fer
tility
Po
pul
atio
n15
to
64
tota
l fer
tility
tab
le
Hig
h
Sch
ool
Colle
ge
Educ
atio
n
Vo
lunt
ary
Une
mp
loye
d
Em
plo
yed
Lab
or
Go
ing
to
Co
llege
Colle
ge
Gra
dua
tion
HS
Gra
dua
tion
New
Em
plo
ymen
t
colle
geat
tend
ance
ratio
Hig
hsc
hoo
ling
time
Colle
ge
scho
olin
g
time
Une
mp
loye
d
Lab
or
Net
Em
plo
ymen
t
lab
or
forc
e
par
ticip
atio
n ra
tio
Tim
e to
Adju
st
Lab
or
Lab
or
Fo
rcemat
urat
ion
64
to
65
Ret
ired
(Vo
lunt
ary)
<D
esir
ed
Out
put
(rea
l)>
Des
ired
Lab
or
<P
rice
>
<E
xcis
e T
ax
Rat
e>
<E
xpo
nent
on
Lab
or>
Une
mp
loy
men
t ra
te
To
tal
Gra
dua
tion
Ret
ired
(Em
plo
yed
)
New
Une
mp
loym
ent
Pro
duc
tive
Pop
ulat
ion
<H
igh
Sch
ool> <
Co
llege
Ed
ucat
ion>
<V
olu
ntar
y
Une
mplo
yed
>
<L
abo
r F
orc
e>
Po
rtio
n to
15
to
44
initi
al
pop
ulat
ion
15
to
64
Initi
ally
Em
plo
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Lab
or
Initi
ally
Une
mp
loye
dL
abo
r
<E
xpec
ted
Wag
e
Rat
e>
<G
DP
Gap
Rat
io>
Lab
or
Mar
ket
Fle
xib
ility
Figure 30: Population and Labor Force
35
Agg
rega
te
Dem
and (
real
)
Agg
rega
te
Dem
and
Fo
reca
stin
gC
hang
e in
AD
Fore
cast
ing
Tim
e to
Adju
st
Fore
cast
ing
Des
ired
Inv
ento
ry
Des
ired
Inv
ento
ry
Inve
stm
ent
Tim
e to
Adju
st
Inve
ntory
Initi
alP
ote
ntia
lG
DP
Cons
umptio
n
Go
vern
men
t
Exp
enditu
re
Cap
ital (
PP
& E
)
(rea
l)D
epre
ciat
ion
(rea
l)
Dep
reci
atio
n R
ate
Ful
l Cap
acity
GD
P
Gro
wth
Rat
e
Pro
duc
tion(
-1)
Gro
wth
Uni
t
<P
rice
>
Gove
rnm
ent
Exp
enditu
re (
real
)
<P
rice
>
Inve
ntory
(re
al)
GD
P (
real
)
<G
DP
(re
al)>
Gro
wth
Rat
e (%
)
Gro
wth
Co
vert
ion
to %
Cons
umptio
n
(rea
l)
Norm
al I
nven
tory
Cove
rage
Des
ired
Out
put
(rea
l)
Inve
nto
ryIn
vest
men
t(r
eal)
Gro
ss D
om
estic
Exp
enditu
re (
real
)
Des
ired
Cap
ital
(rea
l)
Exp
one
nt
on
Cap
ital
Tim
e to
Adju
st
Cap
ital
Exp
one
nt
on
Lab
or
Initi
alC
apita
l(r
eal)
Agg
rega
teD
eman
dF
ore
cast
ing
(Long
-run
)Cha
nge
in A
D
Fore
cast
ing
(Long
-run
)
Tim
e to
Adju
st
Fore
cast
ing
(Long
-run
)
Cap
ital-
Out
put
Rat
io
Long
-run
Pro
duc
tion
Gap
<F
ull C
apac
ity
GD
P>
<In
tere
st R
ate>
GD
P G
ap
Rat
io
<E
xcis
e T
ax
Rat
e>
Inve
stm
ent
(rea
l)
<In
vest
men
t
(rea
l)>
Net
Inv
estm
ent
(rea
l)
Des
ired
Cap
ital-
Out
put
Rat
io
<C
apita
l-O
utput
Rat
io>
<E
mplo
yed
Lab
or>
Tec
hno
logi
cal
Cha
nge
Po
tent
ial
GD
P
<L
abo
r F
orc
e>
Initi
al
Lab
or
Fo
rce
Sal
es (
real
)
Cap
ital u
nder
Cons
truc
tion
Cap
ital
Com
ple
tion
Cons
truc
tion
Per
iod
Inte
rest
Sen
sitiv
ity
Des
ired
Inve
stm
ent
(rea
l)
<In
vest
men
t><
Pri
ce>
<G
DP
(re
al)>
<In
itial
Cap
ital
(rea
l)>
<E
ffec
t on
Cons
ump
tion>
Exp
ort
s (r
eal)
<Im
port
s (r
eal)
.f>
<R
eal F
ore
ign
Exc
hang
e R
ate>
<Im
port
s (r
eal)
>N
et E
xport
s
(rea
l)
<P
ublic
Mone
y
Exp
enditu
re>
Figure 31: GDP Determination
36
Inte
rest
Rat
e
Cha
nge
in
Inte
rest
Rat
e
Dem
and for
Mone
y(r
eal)
Mone
y
Sup
ply
Del
ay T
ime
of
Inte
rest
Rat
e C
hang
e
Pri
ce
Cha
nge
in P
rice
Del
ay T
ime
of
Pri
ce C
hang
e
Initi
al P
rice
leve
l
<C
ash
(Cons
umer
)>
<C
ash
(Pro
duc
er)>
<C
ash
(Gove
rnm
ent)
>
Infla
tion
Rat
e
Pri
ce (
-1)
Inte
rest
Rat
e
(nom
inal
)
<D
epo
sits
(B
anks)
>
Initi
alIn
tere
stR
ate
Cur
renc
y in
Cir
cula
tion
<D
esir
ed
Out
put
(re
al)>
<In
flatio
n R
ate>
Vel
oci
ty o
f
Mone
y
Sup
ply
of
Mone
y(r
eal)
Dem
and for
Mone
y
Dem
and
for
Mone
y by
Pro
duc
ers
Dem
and fo
r
Mone
y by
Cons
umer
s
Dem
and for
Mone
y by
the
Gove
rnm
ent
<In
tere
st p
aid b
y P
roduc
er>
<D
ivid
ends>
<In
com
e T
ax>
<C
ons
umptio
n>
<G
ove
rnm
ent
Deb
t
Red
emptio
n><
Inte
rest
pai
d b
y th
eG
ove
rnm
ent>
<G
ove
rnm
ent
Exp
enditu
re>
Act
ual
Vel
oci
ty o
fM
one
y
<P
aym
ent
by
Pro
duc
er>
Dem
and fo
r
Mone
y by
Ban
ks
Exp
ecte
d
Wag
e R
ate
Wag
e R
ate
Cha
nge
in
Wag
e R
ate
Initi
al W
age
Rat
e
Del
ay T
ime
of
Wag
e C
hang
e
<D
esir
ed L
abor>
<L
abor
Forc
e>
Rea
l Wag
e
Rat
e
<C
ash
Dem
and>
<S
avin
g>
<D
esir
ed I
nves
tmen
t>
Wag
e R
ate
Cha
nge
Cost
-pus
h (W
age)
Co
effic
ient
Dis
cout
Rat
e
Cha
nge
Dis
coun
t R
ate
Cha
nge
Tim
e
<V
ault
Cas
h
(Ban
ks)
>
<C
ash
out
><
Sec
uriti
es p
urch
ased
by
Ban
ks>
<L
endin
g
(Ban
ks)
>
<P
aym
ent
by
Ban
ks>
<F
ore
ign
Exc
hang
e out
>
<F
ore
ign
Exc
hang
e S
ale>
Mone
yR
atio
Des
ired
Inte
rest
Rat
eE
ffec
t on
Inte
rest
Rat
e
Mone
y R
atio
Ela
stic
ity
(Effec
t on
Inte
rest
Rat
e)
Out
put
Rat
io E
last
icity
(Eff
ect
on
Pri
ce)
<P
ote
ntia
l GD
P>
<In
vent
ory
(re
al)>
<D
esir
ed
Inve
nto
ry>
Pro
duc
tion
Rat
io
Inve
nto
ry
Rat
io
Wei
ght
of
Inve
nto
ry R
atio
Effec
t on
Pri
ceD
esir
edP
rice
Lab
or
Rat
io
Effec
t on
Wag
eL
abor
Rat
io E
last
icity
(Effec
t o
n W
age)
Des
ired
Wag
e
<N
et F
ore
ign
Exc
hang
e (B
anks)
>
<F
ore
ign
Exc
hang
e
(Ban
ks)
>
Dis
coun
t
Rat
e
Initi
alD
isco
unt
Rat
e
Dis
coun
t R
ate
(Sei
gnio
rage
)
Dis
coun
t R
ate
Adju
stm
ent
Figure 32: Interest Rate, Price and Wage Rate
37
Inve
nto
ry
Cas
h (P
roduc
er)
Ret
aine
d E
arni
ngs
(Pro
duc
er)
GD
P (
Rev
enue
s)
Wag
es
Div
iden
ds
Pro
fits
bef
ore
Tax
<W
ages
>
<W
ages
>
Cas
h
Flo
w
<D
ivid
ends>
Cap
ital S
hare
sC
apita
l Sha
res
New
ly I
ssue
d
Deb
t (P
rod
ucer
)
Cas
h F
low
fro
m
Oper
atin
g A
ctiv
ities
Cas
h F
low
fro
m
Inve
stin
g A
ctiv
ities
Cas
h F
low
Def
icit
(Pro
duc
er)
New
Cap
ital
Sha
res
Dir
ect
Fin
anci
ng
Rat
io
<N
ew C
apita
l
Sha
res>
Cas
h F
low
fro
m
Fin
anci
ng A
ctiv
ities
<N
ew C
apita
l
Sha
res>
Op
erat
ing
Act
iviti
es
Inve
stin
g
Act
iviti
es
Fin
anci
ng
Act
iviti
es
<D
ivid
end
s>
Corp
ora
te
Tax
Rat
e
Pro
fits
Co
rpo
rate
Tax
<C
orp
ora
te T
ax>
<C
orp
ora
te T
ax>
<In
tere
st p
aid
by
Pro
duc
er>
<In
tere
st p
aid
by
Pro
duc
er>
<In
tere
st p
aid
by
Pro
duc
er>
<In
tere
st p
aid
by
Pro
duc
er>
Tax
on
Pro
duc
tion
Exc
ise
Tax
Rat
e
Cha
nge
in E
xcis
e R
ate
<T
ime
for
Fis
cal
Po
licy>
<T
ax o
n
Pro
duc
tion>
<T
ax o
n P
rod
uctio
n>
<P
rice
>
<G
DP
(Rev
enue
s)>
<G
DP
(re
al)>
Dom
estic
Sal
es
<D
om
estic
Sal
es>
Cap
ital (
PP
&E
)In
vest
men
tD
epre
ciat
ion
<D
epre
ciat
ion
(rea
l)>
<P
rice
>
<D
epre
ciat
ion>
<E
mp
loye
d
Lab
or>
Des
ired
Fin
anci
ng
Pay
men
t by
Pro
duc
er
Pro
duc
er D
ebt
Red
emp
tion
Pro
duc
er
Deb
t P
erio
d
<P
roduc
er D
ebt
Red
emptio
n>
<P
rod
ucer
Deb
t
Red
emptio
n>
<P
aym
ent
by
Pro
duc
er>
<P
roduc
er D
ebt
Red
emptio
n>
Div
iden
ds
Rat
io
<W
age
Rat
e>
Des
ired
Borr
ow
ing
(Pro
duc
er)
<D
esir
ed
Inve
stm
ent
(rea
l)> D
esir
ed
Inve
stm
ent
<D
esir
ed
Inve
stm
ent><
Len
din
g
(Ban
ks)
>
<L
endin
g
(Ban
ks)
>
<L
end
ing
(Ban
ks)
>
Impo
rts
Impo
rts
(rea
l)Im
po
rts
Coef
ficie
nt
<G
DP
(re
al)>
<F
ore
ign
Exc
hang
e R
ate>
<P
rice
.f>
<Im
port
s>
Dem
and
Index
for
Impo
rts
Impo
rts
Dem
and
Cur
ve
<In
itial
Fo
reig
n
Exc
hang
e R
ate>
Exp
ort
s
<P
rice
>
<E
xpo
rts
(rea
l)>
GN
P
<In
com
e B
alan
ce>
Dir
ect
Ass
ets
Abro
ad
Dir
ect
Inve
stm
ent
Ab
road
Dir
ect
Inve
stm
ent
Dir
ect
Inve
stm
ent
Rat
io
<D
irec
t In
vest
men
t
Ab
road
>
Dir
ect
Inve
stm
ent
Index
Dir
ect
Inve
stm
ent
Ind
ex T
able
<In
tere
st A
rbitr
age
Adju
sted
>
Cap
ital L
iab
ilitie
s
Ab
road
Fo
reig
n D
irec
t
Inve
stm
ent
Ab
road
<D
irec
t In
vest
men
t
Ab
road
.f>
<F
ore
ign
Exc
hang
e R
ate>
<P
rice
>
1
2
12
Pro
fits
for
Div
iden
ds
1
2
<D
ivid
end
s
Ab
road
.f>
Div
iden
ds
Abro
ad
<In
tere
st R
ate
(no
min
al)>
<D
ivid
end
s
Ab
road
>
Impo
rtpul
se
Imp
ort
time
Imp
ort
dur
atio
n
<C
ons
umptio
n>
<In
vest
men
t>
<G
ove
rnm
ent
Exp
end
iture
>
<F
ore
ign
Dir
ect
Inve
stm
ent
Ab
road
>
Figure 33: Transactions of Producers
38
Cas
h
(Cons
umer
)
Cons
umptio
n
Bas
ic
Co
nsum
ptio
n
Mar
gina
l Pro
pen
sity
to C
ons
ume
Dep
osi
ts
(Co
nsum
er)
Sav
ing
Sha
res
(hel
d b
y
Co
nsum
er)
Inco
me
Tax
Inco
me
Tax
Rat
e
Dis
posa
ble
Inco
me
Go
vern
men
t
Sec
uriti
es
(Co
nsum
er)
Sec
uriti
es p
urch
ased
by
Co
nsum
er
<G
ove
rnm
ent
Sec
uriti
es N
ewly
Issu
ed>
Inco
me
Dis
trib
utio
n
by
Pro
duc
ers
<C
orp
ora
te T
ax>
<W
ages
> <D
ivid
ends>
<In
tere
st p
aid
by
Pro
duc
er>
Dis
trib
uted
Inco
me
Lum
p-s
um T
axes
Gove
rnm
ent
Tra
nsfe
rs
Cha
nge
in
Lum
p-s
um T
axes
Co
nsum
er E
qui
ty
Inco
me
<W
ages
>
<D
ivid
end
s>
<In
com
e>
<D
ispo
sab
le
Inco
me>
<In
com
e>
Sec
uriti
es s
old
by
Co
nsum
er
<G
ove
rnm
ent
Deb
t
Red
emp
tion>
<S
ecur
ities
so
ld
by
Co
nsum
er>
Cha
nge
in I
nco
me
Tax
Rat
e
<T
ime
for
Fis
cal P
olic
y>
<D
epre
ciat
ion>
Cur
renc
y
Rat
io
<O
pen
Mar
ket
Pur
chas
e
(Pub
lic S
ale)
>
<O
pen
Mar
ket
Sal
e
(Pub
lic P
urch
ase)
>C
ash
Dem
and
Cas
hing
Tim
e
<G
old
Cer
tific
ates
>
<In
tere
st R
ate
(nom
inal
)>
Cur
renc
y R
atio
Tab
le
<W
ages
(B
ank
s)>
<G
old
Dep
osi
t>
<P
rice
>
Mone
y put
into
Cir
cula
tion
<In
itial
Cap
ital
Sha
res>
Initi
al S
ecur
ity H
old
ing
Rat
io h
eld
by
Co
nsum
er
Sec
urity
Ho
ldin
g R
atio
by
Co
nsum
er
Fin
anci
al
Inve
stm
ent
(Sha
res)
<C
apita
l Sha
res
New
ly I
ssue
d>
Eff
ect
on
Co
nsum
ptio
n
Dep
osi
ts
Ab
road
(Co
nsum
er)F
inan
cial
Inve
stm
ent
Ab
road
Fin
anci
al
Inve
stm
ent
Fin
anci
al
Inve
stm
ent
Rat
io
Initi
al F
inan
cial
Ass
ets
Abro
ad
Fin
anci
al
Inve
stm
ent
Index
Fin
anci
al I
nves
tmen
t
Index
Tab
le
<In
tere
st A
rbitr
age
Adju
sted
>
Inco
me
Ab
road
(Co
nsum
er)
<In
com
e A
bro
ad
(Co
nsum
er)>
<D
irec
t an
d F
inan
cial
Inve
stm
ent
Inco
me>
12
1
3
<In
tere
st p
aid
by
the
Go
vern
men
t (C
ons
umer
)>
<In
tere
st p
aid b
y
Ban
ks
(Co
nsum
er)>
Initi
al G
old
hel
d b
y
the
Pub
lic
Pri
ce E
last
icity
of
Co
nsum
ptio
n
<In
itial
Pri
ce le
vel>
<G
ove
rnm
ent
Sec
uriti
es (
Ban
ks)
><
Go
vern
men
t S
ecur
ities
(Cen
tral
Ban
k)>
Figure 34: Transactions of Consumers
39
Cas
h (G
ove
rnm
ent)
Deb
t (G
ove
rnm
ent)
Gove
rnm
ent
Exp
end
iture
Go
vern
men
t
Def
icit
Go
vern
men
t S
ecur
ities
New
ly I
ssue
d
Gove
rnm
ent
Bo
rro
win
g
Inte
rest
pai
d b
y th
e
Gove
rnm
ent
Cha
nge
in
Go
vern
men
t
Exp
end
iture
Tim
e fo
r
Fis
cal P
olic
y
Pri
mar
y B
alan
ce
Rat
io
Bas
e E
xpen
ditu
re
Rev
enue
-dep
end
ent
Exp
enditu
re
Go
vern
men
t D
ebt
Red
emp
tion
Go
vern
men
t
Deb
t P
erio
d
Ret
aine
d E
arni
ngs
(Go
vern
men
t)
Tax
Rev
enue
s<
Inco
me
Tax
>
<C
orp
ora
te T
ax>
<G
ove
rnm
ent
Sec
uriti
es N
ewly
Issu
ed>
<T
ax R
even
ues>
<In
tere
st p
aid
by
the
Gove
rnm
ent>
<G
ove
rnm
ent
Def
icit>
<G
ove
rnm
ent
Deb
t
Red
emptio
n>
Gro
wth
-dep
end
ent
Exp
end
iture
Cha
nge
in
Exp
end
iture
<G
row
th R
ate>
<T
ax o
n
Pro
duc
tion>
<In
tere
st R
ate
(no
min
al)>
Initi
al G
ove
rnm
ent
Deb
t
Pri
mar
y
Bal
ance
Sw
itch
Initi
al C
ash
(Go
vern
men
t)
Inte
rest
pai
d b
y th
e
Go
vern
men
t (C
entr
al B
ank
)
Inte
rest
pai
d b
y th
e
Go
vern
men
t (B
ank
s)
Inte
rest
pai
d b
y th
e
Go
vern
men
t (C
ons
umer
)
<G
DP
(Rev
enue
s)>
Deb
t-G
DP
rat
io
Sei
gnio
rage
Sw
itch
(Sei
gnio
rage
)
Pub
lic M
one
yIs
sue
Tim
e Issu
e D
urat
ion
<T
ax R
even
ues>
Dep
osi
ts
(Go
vern
men
t)G
ove
rnm
ent
Cre
diti
ng
<S
eign
iora
ge>
<S
witc
h
(Sei
gnio
rage
)>
Pub
lic M
one
y
Exp
end
iture
<P
ublic
Mo
ney>
<In
tere
st p
aid
by
the
Go
vern
men
t>
Pri
mar
y B
alan
ce
Cha
nge
Pri
mar
y B
alan
ce
Cha
nge
Tim
e
Sw
itch
(Sei
gnio
rage
)T
ime
<S
witc
h(S
eign
iora
ge)
Tim
e>
Figure 35: Transactions of Government
40
Ret
aine
d
Ear
ning
s
(Ban
ks)
Inte
rest
pai
d
by
Ban
ks
Inte
rest
pai
db
y P
rod
ucer
Dep
osi
ts
(Ban
ks)
Vau
lt C
ash
(Ban
ks)
Lo
an
(Ban
ks)
Req
uire
d
Res
erve
Rat
io
Dep
osi
ts in
RR
Rat
io C
hang
e
RR
Rat
io C
hang
e T
ime
Res
erve
s
Dep
osi
ts
Req
uire
d
Res
erve
s
<D
eposi
ts in
>
Res
erve
sA
T
<C
ash
Dem
and>
Dep
osi
ts o
ut
Res
erve
s
(Ban
ks)
Cas
h in
Go
vern
men
t
Sec
uriti
es
(Ban
ks)
Sec
uriti
espur
chas
ed b
yB
anks
<O
pen
Mar
ket
Pur
chas
e
(Ban
ks
Sal
e)>
<O
pen
Mar
ket
Sal
e
(Ban
ks
Pur
chas
e)>
<L
oan
(B
anks)
>
<S
avin
g>
<In
tere
st R
ate
(nom
inal
)>P
rim
e R
ate
Pro
fits
(Ban
ks)
<In
tere
st p
aid b
y
Ban
ks>
Wag
es (
Ban
ks)
Pay
men
t
by
Ban
ks
Cas
h out
<P
rod
ucer
Deb
t
Red
emp
tion>
<P
roduc
er D
ebt
Red
emptio
n>
Pri
me
Rat
e
Pre
miu
m
<G
ove
rnm
ent
Sec
uriti
es
New
ly I
ssue
d>
Exc
ess
Res
erve
Rat
io
<In
itial
Req
uire
d R
eser
ve R
atio
>
Sec
uriti
es s
old
by
Ban
ks
<S
ecur
ities
sold
by
Ban
ks>
<G
ove
rnm
ent
Deb
t
Red
emptio
n>S
ecur
ity H
old
ing
Rat
io b
y B
anks
Net
Dep
osi
ts
Exc
ess
Res
erve
s
Adju
stin
g
Res
erve
s
<E
xces
s
Res
erve
s>
<D
eposi
ts o
ut>
<F
inan
cial
Inve
stm
ent
(Sha
res)
><
Sec
uriti
espur
chas
ed b
yC
ons
umer
>
<D
esir
edB
orr
ow
ing
(Pro
duc
er)>
Deb
t
(Ban
ks)
Dis
coun
t R
ate
<D
ebt
(Ban
ks)
>
Cas
h F
low
Def
icit
(Ban
ks)
<C
ash
out
>
<R
eser
ves
Dep
osi
ts>
<S
ecur
ities
pur
chas
ed b
y
Ban
ks>
<D
esir
edB
orr
ow
ing
(Pro
duc
er)>
<P
aym
ent
by
Ban
ks>
Des
ired
Borr
ow
ing
(Ban
ks)
Ban
ks
Deb
t
Red
emptio
n
Ban
ks
Deb
t
Per
iod
<B
anks
Deb
t
Red
emptio
n>
Open
Mar
ket
Oper
atio
ns
Borr
ow
ing
(Ban
ks)
Len
din
g (B
ank
s)
Fore
ign
Exc
hang
e
(Ban
ks)
Fo
reig
n
Exc
hang
e out
<Im
port
s>
Fo
reig
n
Exc
hang
e in<
Exp
ort
s>
<Im
port
s>
<F
ore
ign
Exc
hang
e
Pur
chas
e>
<F
ore
ign
Exc
hang
e S
ale>
Net
Gai
ns b
yC
hang
es in
Fo
reig
n E
xcha
nge
Rat
e
Fo
reig
nE
xcha
nge
(Bo
ok V
alue
)
<F
ore
ign
Exc
hang
e
Rat
e> <F
ore
ign
Exc
hang
e
(Ban
ks)
(F
E)>
Net
Gai
n
Adju
stm
ent
Tim
e
<N
et G
ains
by
Cha
nges
in F
ore
ign
Exc
hang
e R
ate>
Fin
anci
al
Lia
bili
ties
Abro
adF
ore
ign
Fin
anci
al
Inve
stm
ent
Abro
ad<
Fin
anci
al I
nves
tmen
t
Abro
ad.f>
<F
ore
ign
Exc
hang
e R
ate>
Dir
ect
and F
inan
cial
Inve
stm
ent
Inco
me
<F
ore
ign
Fin
anci
al
Inve
stm
ent
Abro
ad>
Inte
rest
on
Fin
anci
al
Lia
bili
ties
Abro
ad
<In
tere
st R
ate
(nom
inal
)>
Fore
ign
Dir
ect
and
Fin
anci
al I
nves
tmen
tIn
com
e
<In
tere
st o
n F
inan
cial
Lia
bili
ties
Ab
road
>
<In
tere
st o
n
Fin
anci
al L
iabili
ties
Abro
ad>
<F
inan
cial
Inve
stm
ent
Abro
ad>
<F
inan
cial
Inve
stm
ent
Abro
ad>
<D
irec
t In
vest
men
t
Abro
ad>
<D
irec
t In
vest
men
t
Abro
ad>
Fore
ign
Cas
h o
ut
<F
ore
ign
Cas
h
out
>
2
3
2
3
2
3
2
3
2<
Div
iden
ds
Abro
ad>
3
<D
ivid
ends
Abro
ad>
<D
ivid
ends
Ab
road
.f>
<In
tere
st o
nF
inan
cial
Lia
bili
ties
Ab
road
.f>
<A
dju
stin
g
Res
erve
s>
Inte
rest
Inc
om
e
(Ban
ks)
Inte
rest
pai
db
y B
ank
s(C
ons
umer
)
Inte
rest
pai
dby
Ban
ks
(Cen
tral
Ban
k)
<In
tere
st p
aid b
y th
e
Gove
rnm
ent
(Ban
ks)
>
<In
tere
st I
ncom
e
(Ban
ks)
>
<F
ore
ign
Exc
hang
e
Pur
chas
e><
Fore
ign
Exc
hang
e
Sal
e>
<G
ove
rnm
ent
Sec
uriti
es (
Cons
umer
)>
<G
ove
rnm
ent
Sec
uriti
es
(Cen
tral
Ban
k)>
<L
endin
g (C
entr
al
Ban
k)>
<L
end
ing
Dis
trib
utio
n>
Len
din
g (C
entr
al
Ban
k-R
eser
ves)
<F
ore
ign
Exc
hang
e in
>
<F
ore
ign
Dir
ect
Inve
stm
ent
Ab
road
>
<F
ore
ign
Fin
anci
al
Inve
stm
ent
Ab
road
>
RR
Rat
io C
hang
e2
RR
Rat
io
Cha
nge2
Tab
le
<S
witc
h (S
eign
iora
ge)>
<L
end
ing
(Pub
lic
Mone
y)>
<B
orr
ow
ing
(Ban
ks)
>
Len
din
g (C
entr
al
Ban
k a
nd P
MA
)<
Len
din
g
Dis
trib
utio
n>
<S
witc
h
(Sei
gnio
rage
)>
<B
orr
ow
ing
(Ban
ks)
>
Figure 36: Transactions of Banks
41
Gold
Sta
ndar
d
Go
ld
Cur
renc
y
Out
stan
din
g
Res
erve
s
(Cen
tral
Ban
k)
Gold
Dep
osi
t
No
tes
New
ly
Issu
ed
Dep
osi
t T
ime
Res
erve
s b
y
Ban
ks
Go
ld C
ertif
icat
es
Gove
rnm
ent
Sec
uriti
es
(Cen
tral
Ban
k)
Op
en M
ark
et
Pur
chas
e
Op
en M
ark
et
Pur
chas
e T
ime
Open
Mar
ket
Pur
chas
eO
per
atio
n
<G
ove
rnm
ent
Sec
uriti
es
(Cons
umer
)>
Open
Mar
ket
Sal
e
Open
Mar
ket
Sal
e T
ime
Op
en M
arket
Sal
e O
per
atio
n
Open
Mar
ket
Sal
e
(Pub
lic P
urch
ase)
No
tes
With
dro
wn
Op
en M
ark
et
Pur
chas
e
(Pub
lic S
ale)
Open
Mar
ket
Pur
chas
e
(Ban
ks
Sal
e)
<G
ove
rnm
ent
Sec
uriti
es
(Ban
ks)
>
<O
pen
Mar
ket
Pur
chas
e (P
ublic
Sal
e)>
Op
enM
ark
et S
ale
(Ban
ks
Pur
chas
e)
Op
en M
ark
et
Pub
lic S
ales
Rat
e
Initi
al S
equr
ity H
old
ing
Rat
io b
y C
entr
al B
ank
Mo
neta
ry B
ase
Go
ld D
epo
sit
by
the
Pub
lic
<R
eser
ves
Dep
osi
ts>
<A
dju
stin
g
Res
erve
s>
Incr
ease
in
Res
erve
sD
ecre
ase
in
Res
erve
s
Dis
coun
t L
oan
(Cen
tral
Ban
k)
Len
din
g
(Cen
tral
Ban
k)
<L
end
ing
(Cen
tral
Ban
k)>
Len
din
g b
y P
MA
(Cen
tral
Ban
k)
Len
din
g
Tim
e
Len
din
g
Per
iod
<D
esir
ed
Bo
rrow
ing
(Ban
ks)
>
Win
dow
Gui
dan
ce
Fore
ign
Exc
hang
e
Res
erve
s
Fo
reig
n E
xcha
nge
Pur
chas
eF
ore
ign
Exc
hang
e
Low
er B
oun
d
<F
ore
ign
Exc
hang
e R
ate>
<F
ore
ign
Exc
hang
e
Pur
chas
e>
Fore
ign
Exc
hang
e
Sal
eF
ore
ign
Exc
hang
e
Up
per
bo
und
<F
ore
ign
Exc
hang
e S
ale>
<B
anks
Deb
t
Red
emp
tion>
Ret
aine
d
Ear
ning
s
(Cen
tral
Ban
k)
Inte
rest
Inc
om
e
(Cen
tral
Ban
k)
<In
tere
st p
aid
by
Ban
ks
(Cen
tral
Ban
k)>
<In
tere
st p
aid
by
the
Go
vern
men
t (C
entr
al B
ank)>
<In
tere
st I
nco
me
(Cen
tral
Ban
k)>
Initi
al G
old
hel
d b
y
the
Pub
lic
Gro
wth
Rat
e o
f
Cre
dit
Len
din
g (C
entr
al
Ban
k)(
-1)
Cur
renc
y O
utst
and
ing
(-V
ault
Cas
h)
<V
ault
Cas
h
(Ban
ks)
>
Sec
urity
Ho
ldin
g R
atio
by
Cen
tral
Ban
k
Sec
uriti
es p
urch
ased
by
Cen
tral
Ban
k
Sec
uriti
es s
old
by
Cen
tral
Ban
k
<G
ove
rnm
ent
Sec
uriti
es (
Cons
umer
)>
<G
ove
rnm
ent
Sec
uriti
es (
Ban
ks)
>
<G
ove
rnm
ent
Sec
uriti
es
New
ly I
ssue
d>
<G
ove
rnm
ent
Deb
t
Red
emp
tion>
<O
pen
Mar
ket
Sal
e
(Pub
lic P
urch
ase)
>
<S
ecur
ities
pur
chas
ed b
y
Cen
tral
Ban
k>
<O
pen
Mar
ket
Pur
chas
e
(Ban
ks
Sal
e)>
Len
din
g
Dis
trib
utio
n
<E
xport
s><
Imp
ort
s>
Sei
gnio
rage
Ass
ets
Res
erve
s
(Go
vern
men
t)
<S
eign
iora
ge>
<S
eign
iora
ge>
<G
ove
rnm
ent
Cre
diti
ng>
Ban
ks
Deb
t R
edem
ptio
n
(Pub
lic M
one
y)L
endin
g (P
ublic
Mone
y)
<S
witc
h
(Sei
gnio
rage
)>
Ban
ks
Deb
t R
edem
ptio
n
(Cen
tral
Ban
k)
Des
ired
Len
din
g
<L
end
ing
(Pub
lic
Mone
y)>
Figure 37: Transactions of Public Money Administration (Central Bank)
42
Fo
reig
n
Exc
hang
e R
ate
Cha
nge
in F
ore
ing
Exc
hang
e R
ate
Initi
al F
ore
ign
Exc
hang
e R
ate
Fore
ign
Exc
hang
e
Rat
io
Adju
stm
ent
Tim
e
of F
E
Fo
reig
n
Exc
hang
e
(Ban
ks)
(F
E)
Imp
ort
s (F
ore
ign
Exp
ort
s)
<E
xpo
rts.
f>
Exp
ort
s (F
ore
ign
Imp
ort
s)
<Im
po
rts.
f>
Sup
ply
of F
ore
ign
Exc
hang
e
Dem
and
fo
r F
ore
ign
Exc
hang
e
Rea
l Fo
reig
n
Exc
hang
e R
ate
<P
rice
> <P
rice
.f>
Fore
ign
Exc
hang
e P
urch
ase
(FE
)F
ore
ign
Exc
hang
e S
ale
(FE
)
<F
ore
ign
Exc
hang
e
Pur
chas
e><
Fore
ign
Exc
hang
e S
ale>
Initi
al F
ore
ign
Exc
hang
e (F
E)
Exp
ecte
d
Fo
reig
n
Exc
hang
e R
ate
Cha
nge
in E
xpec
ted
Fo
reig
n E
xcha
nge
Rat
e
Ad
just
men
t T
ime
of
Fo
reig
n E
xcha
nge
Exp
ecta
tion
Exp
ecte
d
Cha
nge
in
FE
R
seed
s
mea
n
stan
dar
d
dev
iatio
n
<In
tere
st
Rat
e>
<In
tere
st
Rat
e.f>
Inte
rest
Arb
itrag
e
Ad
just
ed
Inte
rest
Arb
itrag
eA
dju
sted
.f
Inte
rest
Arb
itrag
e Inte
rest
Arb
itrag
e.f
Exp
ecte
d R
etur
n o
n
Dep
osi
ts A
bro
ad
Exp
ecte
d R
etur
n o
n
Dep
osi
ts A
bro
ad.f
Arb
itrat
e
Ad
just
men
t T
ime
<F
ore
ign
Exc
hang
e R
ate>
<E
xpec
ted
Fo
reig
n
Exc
hang
e R
ate>
<A
rbitr
ate
Ad
just
men
t T
ime>
Fo
reig
n E
xcha
nge
out
(F
E)
Fore
ign
Exc
hang
e
in (
FE
)
Fo
reig
n D
irec
t an
dF
inan
cial
Inv
estm
ent
Inco
me
(FE
)
<F
inan
cial
Inv
estm
ent
Abro
ad.f
>
<F
inan
cial
Inve
stm
ent
Ab
road
(F
E)>
<D
irec
t
Inve
stm
ent
Ab
road
(F
E)>
<D
irec
tIn
vest
men
tA
bro
ad.f>
Dir
ect
and
Fin
anci
al
Inve
stm
ent
Inco
me
(FE
)
Fo
reig
n E
xcha
nge
Res
erve
s (F
E)
Initi
al F
ore
ign
Exc
hang
e
Ho
ldin
g R
atio
<F
ore
ign
Dir
ect
and
Fin
anci
al I
nves
tmen
tIn
com
e>
Eff
ect
on
Fo
reig
n
Exc
hang
e R
ate
Rat
io E
last
icity
(E
ffec
t on
Fo
reig
n E
xcha
nge
Rat
e)
Des
ired
Fore
ign
Exc
hang
e R
ate
FF
Rat
io
(Rev
ised
)
Figure 38: Foreign Exchange Market
43
Fo
reig
n
Exc
hang
e
(Ban
ks)
Fo
reig
n
Exc
hang
e o
ut
<Im
po
rts>
Fo
reig
n
Exc
hang
e in
<E
xpo
rts>
<F
ore
ign
Exc
hang
e
Pur
chas
e><
Fo
reig
n
Exc
hang
e S
ale>
Deb
it (
- P
ay
me
nt)
___
__
__
__
__
___
__
__
__
__
__
Cre
dit
(+
Rece
ipt)
Deb
it (
- F
ore
ign
Pa
ym
en
t)_
__
__
__
__
__
__
_ C
red
it (
+ F
ore
ign
Rece
ipt)
Inve
ntory
(Tra
de)
(FE
Rece
ipts
fro
m
Ab
roa
d)
(FE
Dep
osi
ts A
bro
ad
for
Pa
ym
en
t)
<Im
po
rts>
<E
xpo
rts>
Tra
de
Bal
ance
Go
od
s &
Ser
vice
s
Cur
rent
Acc
oun
t
Bal
ance
of
Pay
men
ts
Fin
anci
al
Acc
oun
t
Cap
ital &
Fin
anci
al
Acc
oun
t
Oth
er I
nves
tmen
t
(Cre
dit)
Oth
er I
nves
tmen
t
(Deb
it)
Oth
er I
nves
tmen
t
Cha
nges
in
Res
erve
Ass
ets
Dir
ect
and P
ort
folio
Inv
estm
ent
<O
ther
Inve
stm
ent>
<C
hang
es in
Res
erve
Ass
ets>
Ass
ets
Abro
ad
<F
ore
ign
Exc
hang
eP
urch
ase>
<F
ore
ign
Exc
hang
e S
ale>
Ret
aine
d
Ear
ning
s an
d
Co
nsum
er
Eq
uity
Ear
ning
s in
<N
et G
ains
by
Cha
nges
in
Fo
reig
n E
xcha
nge
Rat
e>
Ser
vice
Inc
om
e
Lia
bili
ties
Abro
ad
<D
irec
t an
d F
inan
cial
Inve
stm
ent
Inco
me>
<F
ore
ign
Fin
anci
al
Inve
stm
ent
Ab
road
>
<F
ore
ign
Fin
anci
al
Inve
stm
ent
Ab
road
>
<F
ore
ign
Dir
ect
and
Fin
anci
al I
nves
tmen
tIn
com
e>E
arni
ngs
out
<F
ore
ign
Dir
ect
and
Fin
anci
alIn
vest
men
tIn
com
e>
<D
irec
t an
dF
inan
cial
Inve
stm
ent
Inco
me>
Inco
me
Bal
ance
<F
inan
cial
Inve
stm
ent
Ab
road
>
<F
inan
cial
Inve
stm
ent
Ab
road
>
<D
irec
t In
vest
men
t
Ab
road
>
<D
irec
tIn
vest
men
tA
bro
ad>
<F
ore
ign
Dir
ect
Inve
stm
ent
Ab
road
>
<F
ore
ign
Dir
ect
Inve
stm
ent
Ab
road
>
Net
Fo
reig
n
Exc
hang
e (B
ank
s)
Figure 39: Balance of Payment
44
60
0Y
enR
eal/Y
ear
0.2
1/Y
ear
45
0Y
enR
eal/Y
ear
-3.7
25
29
e-0
09
1/Y
ear
30
0Y
enR
eal/Y
ear
-0.2
1/Y
ear
15
0Y
enR
eal/Y
ear
-0.4
1/Y
ear
0Y
enR
eal/Y
ear
-0.6
1/Y
ear
66
66
66
66
55
55
55
55
44
44
44
44
4
33
33
33
33
3
22
22
22
22
2
11
11
11
11
1
02
46
81
01
214
16
18
20
22
24
26
28
30
Tim
e (Y
ear)
11
11
11
1
22
22
22
33
33
3
44
44
44
55
55
55
66
66
66
6
80
Yen
/Yea
r
400
Yen
60
Yen
/Yea
r
300
Yen
40
Yen
/Yea
r
200
Yen
20
Yen
/Yea
r
100
Yen
0Y
en/Y
ear
0Y
en
5
5
5
5
5
5
5
55
54
44
44
44
44
4
33
3
3
3
3
33
33
22
22
22
22
22
2
11
11
11
11
11
1
02
46
81
01
214
16
18
20
22
24
26
28
30
Tim
e (Y
ear)
11
11
11
22
22
2
33
33
33
44
44
55
55
55
Cha
nge
in G
ove
rnm
ent
Exp
enditu
re
-40
40
Tim
e fo
r F
isca
l Po
licy
05
0
Corp
ora
te T
ax R
ate
00
.3
Pri
mar
y B
alan
ce C
hang
e
-0.5
0.5
Sw
itch
01
Bas
e E
xpen
ditu
re
20
12
0
Indep
enden
t <
--->
Rev
enue
-dep
enden
t
2Y
en/Y
enR
eal
0.0
41
/Yea
r
1.5
Yen
/Yen
Rea
l
0.0
32
51
/Yea
r
1Y
en/Y
enR
eal
0.0
25
1/Y
ear
0.5
Yen
/Yen
Rea
l
0.0
17
51
/Yea
r
0Y
en/Y
enR
eal
0.0
11
/Yea
r
2
2
22
22
22
22
22
22
2
111
11
11
11
11
11
11
1
30
032
23
43
36
538
6
"GD
P (
real
)"
11
11
11
11
11
1
22
22
22
22
22
2
"Cha
nge
in L
ump-s
um T
axes
"
-10
30
Go
vern
men
t D
ebt
Per
iod
150
Cha
nge
in I
nco
me
Tax
Rat
e
-0.1
0.1
Cha
nge
in E
xcis
e R
ate
-0.0
50.1
5
Initi
al G
ove
rnm
ent
Deb
t
05
00
100
Per
son
0.4
Per
son/
Yea
r
90
Per
son
0.2
Per
son/
Yea
r
80
Per
son
0P
erso
n/Y
ear
70
Per
son
-0.2
Per
son/
Yea
r
60
Per
son
-0.4
Per
son/
Yea
r
33
3
33
33
33
33
33
2
22
2
22
2
22
22
22
1
1
1
11
11
11
11
1
1
02
46
81
01
214
16
18
20
22
24
26
28
30
Tim
e (Y
ear)
11
11
11
1
22
22
22
22
33
33
33
3
Del
ay T
ime
of P
rice
Cha
nge
02
.4
Del
ay T
ime
of W
age
Cha
nge
01
0
Lab
or
Mar
ket
Fle
xib
ility
01
0
"Co
st-p
ush
(Wag
e) C
oef
ficie
nt"
00.6
8
"Out
put
Rat
io E
last
icity
(E
ffec
t on
Pri
ce)"
02
Wei
ght
of
Inve
ntory
Rat
io
01
"Lab
or
Rat
io E
last
icity
(E
ffec
t on
Wag
e)"
02
"Mone
y R
atio
Ela
stic
ity (
Eff
ect
on
Inte
rest
Rat
e)"
0.1
2
Del
ay T
ime
of In
tere
st R
ate
Cha
nge
12
0
Vel
oci
ty o
f M
one
y
0.5
1.5
5
5
5
5
55
4
4
4
4
4
4
4
33
3
3
3
33
2
22
22
22
11
1
1
1
11
11
11
11
22
23
34
44
45
55
"Sw
itch
(Sei
gnio
rage
)"
01
Pub
lic M
one
y
05
0
Issu
e T
ime
150
Issu
e D
urat
ion
11
5
Pri
mar
y B
alan
ce C
hang
e T
ime
150
"Sw
itch
(Sei
gnio
rage
) T
ime"
03
0
Figure 40: Simulation Panel of GDP
45
600
Yen
Rea
l/Yea
r
0.2
1/Y
ear
300
Yen
Rea
l/Yea
r
-0.2
1/Y
ear
0Y
enR
eal/Y
ear
-0.6
1/Y
ear
66
66
66
66
6
55
55
55
55
5
44
44
44
44
44
33
33
33
33
33
22
22
22
22
22
11
11
11
11
11
01
23
45
67
89
10
11
12
13
14
15
16
17
18
19
Tim
e (Y
ear)
11
11
11
1
22
22
22
33
33
3
44
44
44
55
55
55
66
66
66
66
1.4
1.2 1
0.8
0.6
33
33
33
33
33
33
33
33
33
22
22
22
22
22
22
22
22
22
11
11
11
11
11
11
11
11
11
01
23
45
67
89
10
11
12
13
14
15
16
17
18
19
Tim
e (Y
ear)
11
11
11
11
11
1
22
22
22
22
33
33
33
33
3
0.6
0.3 0
-0.3
-0.6
22
2
22
2
22
22
2
2
11
1
1
1
1
11
1
1
1
1
02
46
81
012
14
16
18
Tim
e (Y
ear)
11
11
11
22
22
22
0.8
0.4 0
-0.4
-0.8
44
44
44
44
33
33
33
33
22
2
2
22
2
2
11
1
1
11
1
1
1
02
46
81
01
21
41
61
8
Tim
e (Y
ear)
11
11
11
22
22
23
33
33
44
44
4
Import
s C
oef
ficie
nt
00
.2
"Im
port
s C
oef
ficie
nt.f
"
00
.2
0.0
08
0.0
04 0
-0.0
04
-0.0
08
2
2
2
2
2
2
22
2
2
2
2
11
1
1
1
1
11
11
1
1
1
02
46
81
01
21
41
61
8
Tim
e (Y
ear)
11
11
11
11
22
22
22
22
Fin
anci
al I
nves
tmen
t R
atio
00.2
"Fin
anci
al I
nves
tmen
t R
atio
.f"
00.2
40
Yen
/Yea
r
0.6
Yen
/Yea
r
30
Yen
/Yea
r
0Y
en/Y
ear
20
Yen
/Yea
r
-0.6
Yen
/Yea
r
33
3
3
3
3
3
3
3
3
22
22
22
22
22
2
11
11
11
11
11
1
02
46
810
12
14
16
18
Tim
e (Y
ear)
11
11
11
22
22
22
33
33
2
1.4
0.8
0.2
-0.4
22
2
22
22
22
2
22
22
2
2
11
11
11
1
1
11
11
11
11
02
46
81
01
214
16
18
Tim
e (Y
ear)
11
11
11
11
11
12
22
22
22
22
2
Dir
ect
Inve
stm
ent
Rat
io
00.2
"Dir
ect
Inve
stm
ent
Rat
io.f
"
00.2
Ad
just
men
t T
ime
of
FE
13
0
Initi
al F
inan
cial
Ass
ets
02,0
00
"Ini
tial F
inan
cial
Ass
ets.
f"
02,0
00
seed
s
110
0m
ean
-0.1
0.1
1.5
1.2
5 1
0.7
5
0.5
33
33
33
33
33
33
33
33
32
22
22
22
22
22
22
22
22
21
11
11
11
11
11
11
11
11
1
01
23
45
67
89
10
11
12
13
14
15
16
17
18
19
Tim
e (Y
ear)
11
11
11
11
11
11
11
22
22
22
22
22
22
2
33
33
33
33
3
"Rat
io E
last
icity
(E
ffec
t on
Fore
ign
Exc
hang
e R
ate)
"
01.5
stan
dar
d d
evia
tion
00
.3
Figure 41: Simulation Panel of Trade and Investment Abroad
46
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48