Development and Applications of a Novel Global Economic Model

IDE Research Bulletin

YANO Takayuki

March 2018

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Background and purpose of this research

This paper aims at developing a new approach for global economic modeling; specifically, a local currency-based global multi-sectoral model and a model on international finance.

The history of the world economy shows that economic interdependence of nations has been strengthened through trade and investment. Project LINK is a pioneering macroeconometric model which describes a global economy in the context of economic interdependence. Subsequently, many institutions and scholars construct multi-county macroeconometric models. However, recent economic deregulation enables firms to investment overseas. In fact, firm-level foreign direct investment is growing rapidly. Therefore, macroeconometric models are not necessarily adequate for global economic analysis. Instead, a global model at sector level is more appropriate for analyzing the current world economy. Regarding multi-country multi-sectoral models, the following four types of models have been developed: 1) computable general equilibrium (CGE) model, 2) the INFORUM system which interlinks national input-output models with a trade linkage model, 3) single-period international input-output model, and 4) price-linked multi-country multi-sectoral model. However, the first three models have shortcomings: a typical CGE model lacks statistical foundations of parameters; the INFORUM system might have inconsistency between classifications in input-output tables and trade matrix; a single-period international input-output model has limitations in specifications and estimation of behavioral equations due to the use of only a single-period international input-output table. A price-linked multi-country multi-sectoral model improves the flaws of these three models, yet it has a drawback: that is, a currency problem. The model is denominated in international dollars.

In reality, however, economic agents make their decisions by focusing on economic performance of their economies in their currencies rather than a foreign currency. In addition, goods and money flow interdependently, not independently. These models can analyze international trade; however, they cannot deal with international monetary flows. This shows that we must build a local currency-based global model in order to analyze issues on both international trade and finance.

This research is composed of two parts. One is construction of a model on international trade. The other is construction of a model on international finance.