Overall Picture and Structure of the Fiscal Economic Model

The "Fiscal Economic Model" is a macroeconomic model designed to ensure coherent interactions between the macro economy and the fiscal and social security system while giving the full-length formulation of fiscal balance and the social security system. The objective of this model is to develop mid-and-long term estimates of economic and fiscal conditions, which can be agreeable to the actual economic and fiscal data in Japan. In this paper, we discuss the underlying philosophy of the model, describe the actual theory behind the model equations, and present the results of a multiplier analysis to verify the characteristics of the model. This model, referring to the structure of the macroeconomic model of the Office of Macroeconomic Analysis in the Cabinet Office (2009), basically relates to the IS/LM-Philips Curve model, and is developed in consideration of the previous studies concerning social security benefits and costs, and tax revenue elasticity. In particular, this model can analyze the effects of aging population combined with the diminishing number of children on fiscal conditions and the macro economy.