Analysis of the Possible Impact of a Tokyo Mega Earthquake on Japanese Public Finance

Abstract

In this chapter, I offer an assessment of how a mega earthquake in Tokyo would affect the macroeconomy of Japan and public finance. This is based on a joint research project with Prof. Oguro of Hosei University.

Appendix

See Table 3.

Table 3 List of variables

List of equations

$$\pi_{t} = c_{1} + c_{2} (1 + GDP_{t - 1} + c_{3} \left( {\frac{{e_{t - 1} }}{{e_{t - 2} }} - 1} \right) + \sigma_{1} \varepsilon_{t}^{\pi }$$

(1)

$$Y_{t} = A_{t} \left[ {RK_{t} } \right]^{\alpha } \left[ {\left( {L_{t} - DL_{t} } \right)HL_{t} } \right]^{1 - \alpha }$$

(2)

$$\begin{aligned} \log (GDP_{t} ) =\,& c_{4} + c_{5} \log (PC_{t} ) + c_{6} \log (PI_{t} ) + c_{7} \log (GC_{t} + GI_{t} + DGI_{t} ) \\ &+ c_{8} NE_{t} - DGDP_{t} + \sigma_{2} \varepsilon_{t}^{GDP} \end{aligned}$$

(3)

$$PC_{t} = c_{9} + c_{10} GDP_{t - 1} + c_{11} GR_{t - 1} + \sigma_{3} \varepsilon_{t}^{PC}$$

(4)

$$\log (PI_{t} ) = c_{12} + c_{13} \log (GDP_{t - 1} ) + c_{14} JGBR_{t - 1} + \sigma_{4} \varepsilon_{t}^{PI}$$

(5)

$$\frac{{NE_{t} }}{{GDP_{t - 1} }} = c_{15} \frac{{NE_{t - 1} }}{{GDP_{t - 2} }} + c_{16} \log (e_{t} /GPI_{t} ) + \sigma_{5} \varepsilon_{t}^{NE}$$

(6)

• (2) Macro economy (Stock based)

$$K_{t} = c_{17} K_{t - 1} + c_{18} PI_{t} - DK_{t} + \sigma_{6} \varepsilon_{t}^{K}$$

(7)

$$\log (PA_{t} ) = c_{19} \log (PD_{t} \times GDP_{t} ) + c_{20} \log (K_{t} ) + \sigma_{7} \varepsilon_{t}^{PA}$$

(8)

• (3) Government Sector

$$\begin{aligned} PB_{t} = GR_{t} - \frac{{GC_{t} + GI_{t} + DGI_{t} }}{{GDP_{t} }} + \sigma_{8} \varepsilon_{t}^{PB} \hfill \\ \left( {GR_{t} \equiv \left( {c_{21} + c_{22} \frac{{(GDP_{t - 1} )^{\xi } }}{{GDP_{t} }} - DR_{t} + DPB_{t} } \right) \times GDP_{t} } \right) \hfill \\ \end{aligned}$$

(9)

$$GC_{t} = c_{23} + c_{24} GDP_{t - 1} + c_{25} OR_{t} + \sigma_{9} \varepsilon_{t}^{GC}$$

(10)

• (4) JGB interest rate

$$JGBR_{t} = c_{26} JGBR_{t - 1} + c_{27} \frac{{PD_{t - 1} \times GDP_{t - 1} }}{{PA_{t - 1} }} + c_{28} \pi_{t} + \sigma_{10} \varepsilon_{t}^{JGBR}$$

(11)

$$GPI_{t} = c_{29} GPI_{t - 1} \left( {1 + \pi_{t} } \right) + \sigma_{11} \varepsilon_{t}^{GPI}$$

(12)

$$\log (e_{t} ) = c_{30} \log (e_{t - 1} ) + c_{31} \log (JGBR_{t} ) + c_{32} \left( {PD_{t - 1} /PD_{t - 2} - 1} \right) + \sigma_{12} \varepsilon_{t}^{re}$$

(13)

$$u_{t} = c_{33} + c_{34} \left( {1 + \pi_{t} } \right) + \sigma_{13} \varepsilon_{t}^{u}$$

(14)