Macroeconomic and Industry Level Implications of Alternative Macro, Trade, and Industry Policies New NIRA-LINK Model Simulations

Transcription

1 Jurnal f Applied Input-Output Analysis, Vl., N., Macrecnmic and Industry Level Implicatins f Alternative Macr, Trade, and Industry Plicies New NIRA-LINK Mdel Simulatins By F. Gerard Adams*, Byrn Gangnes**, and Shuntar Shishid*** Abstract Changing cnditins in the wrld ecnmy and new plicy initiative pssibilities, par ticularly with the cming f a new Administratin in the United States, suggest the need fr anther rund f plicy simulatins with the NIRA-LINK mdel system. Much mdel simulatin wrk, using a variety f mdels, is already underway t evaluate alternative plicies in the United States and in the wrld ecnmy. Fr this kind f wrk, the NIRA-LINK system, encmpassing the Whartn Annual and Industry Mdel f the United States, the FAIS/IUJ Multisectr Mdel f Japan, and the LINK system t handle the rest f the wrld, has sme special advantages.the NIRA- LINK system prvides a disaggregated industrial sectr linkage between the ecnmies f the United States and Japan and cnsequently can deal directly with interrelatinships between the tw ecnmies n the industry level. At the same time, the detailed mdels f the tw cuntries are integrated int the LINK wrld mdel system s that impacts n and feedbacks frm the rest f the wrld ecnmy are taken int accunt(thugh nt at an industrially disaggregated level). The bjective f this paper is t prduce scenari simulatins designed t examine plicy alternatives leading t imprved ecnmic perfrmance n a wrldwide basis. We begin by cnsidering the ecnmic bjectives f individual cuntries and f the wrld ecnmy. Then we cnsider a baseline frecast scenari incrprating plicies f the new Clintn administratin as prpsed during the past few weeks. We then cmpare alternative plicies t this baseline prjectin, seeking plicy scenaris that aim, t the extent pssible, t achieve the plicy bjectives f the majr cuntries and f the wrld ecnmy. The simulatin prjectins include:. A Baseline Frecast f the plicies f the new Clintn administratin fcusing n a) imprvement in the budget deficit situatin, b) shrt term cyclical stimulus measures, and c) plicies designed t imprve the natin's lng term ecnmic perfrmance. (An alternative simulatin with a strng fiscal stimulus is als included.). Internatinal Cncerted Actin scenaris, assuming plicy crdinatin between the majr cuntries aimed at achieving their jint bjectives.. Trade Imprvement scenaris incrprating varius appraches t amelirat ing the imbalance in trade between the United States and Japan.. Natinal and Wrld Ecnmic Objectives Recent develpments in the wrld ecnmy remind us again f the difficulty f managing ec nmic plicy and f crdinating plicies t btain an ptimal jint utcme fr many cuntries. The recessin in the United States and the twin deficits f the budget and internatinal payments Manuscript received June,. Revised August,. * University f Pennsylvania, ** University f Hawaii at Mana, *** Internatinal University f Japan lfthe WEFA Grup has used the Whartn Quarterly Mdel fr studies f plicy alternatives fr the Clintn administratin (see, fr example, Wesctt and Karl, ) [] and similar wrk is underway in Prject LINK.

2 Macrecnmic and Industry Level Implicatins pse a threat nt nly t ecnmic cnditins in the United States but in ther cuntries as well. Nw that the U.S. ecnmy appears n the verge f at least mdest recvery, gvernment fficials are trying t deal with the budget and trade deficits and with the prblems f slw prductivity grwth. At the same time ther cuntries are encuntering a but f recessin. Japan faces a slwdwn based n a decline f asset values at the same time that it cntinues, r even accelerates, its trade surplus grwth. The Eurpean Cmmunity is challenged by recessin in the United Kingdm and, apparently nw als in Germany and France, while interest rates remain at high levels t guard against inflatin. Only in the past few weeks has the German Bundesbank begun cautiusly t lwer interest rates. The principal targets f the Grup f cuntries, individually and by all f them as part f an interrelated ecnmy, may be summarized as: Hw t accelerate the recvery and emplyment in the United States and t prevent further recessin and unemplyment in Eurpe and Japan, Hw t speed up the prcess f lng term ecnmic grwth, particularly in the United States and in Eurpe, Hw t deal with the imbalances in budgets and trade that still bedevil the wrld ecnmy (particularly with the budget deficit in the United States and the trade surplus in Japan), and t Hw t keep inflatin at its recent mderate level. While many ecnmists wuld put primacy n the bjective f lng term grwth, plitical imperatives make shrt term stabilizatin, emplyment, and price stability very imprtant in the agendas f the wrld's ecnmic plicy makers. Apprpriate equilibria in gvernment budgets and in internatinal trade balances are intermediate bjectives, desirable nt in their wn right but as necessary (thugh clearly nt sufficient) cnditins, fr lng run ecnmic stability and grwth. Managing macrecnmic plicy invlves fur imprtant dimensins:. The tradeff between ecnmic bjectives,. The need t recncile shrt term and lng term aims,. Meeting the needs f particular sectrs in a manner cnsistent with macrecnmic b jectives, and. Recnciling natinal bjectives with the brader aims f the cmmunity f the wrld's ecnmies. The tradeff between bjectives has been seen as a classic prblem f ecnmic plicy making. Currently inflatinary pressures have eased in mst f the wrld as a result f recessin. But the tradeff has nt been frgtten. Indeed in Germany, the Bundesbank's hesitatin t cut interest rates, reflecting its fears f inflatin, has called int questin the viability f the Eurpean Mnetary System and the health f the Cmmunity ecnmy. The prblem f recnciliatin ver time is particularly evident in the current American debate ver fiscal stimulus. Prviding cyclical expenditure stimulus, smething that the vters are anticipating, might well mdestly imprve ecnmic activity and help unemplyment in the shrt run. But it risks a further deteriratin f the budget deficit and, as a cnsequence, a maintenance r even increase in already high lng term interest rates, with ptentially damaging implicatins fr the ecnmy ver the lnger run. The third issue, that f recnciling industrial and sectral interests with macrecnmic bjectives tends t be accrded less weight in academic circles than in plitical discussin. Equity in the incme distributin is als an imprtant bjective. Unfrtunately, few macrecnmic mdels are able t deal realistically with incme distributinal effects.

3 Jurnal f Applied Input-Output Analysis, Vl., N., It is nevertheless an imprtant reality. Fiscal, mnetary, and trade plicies have imprtant impacts n particular industries, the autmbile industry in the US-Jap an case, fr example. In turn, industry specific plicies, being cnsidered as a means t imprve prductivity and internatinal cmpetitiveness, have imprtant cnsequences n the macrecnmic level. (These cnsideratins are an imprtant part f ur wrk with the NIRA-LINK mdel which has been designed specifically t handle such issues.) Finally the furth questin, that f internatinal crdinatin, is vividly illustrated by the prblems f the Eurpean cuntries that have resulted frm German reunificatin and the Bun desbank's tight mnetary plicy respnse. It is als becming very relevant t the relatinship between the United States and Japan, whse bilateral trade disequilibrium exceeds $ billin and is ging even mre sharply ut f balance as a result f the slwdwn in Japan at a time when recvery is beginning in the U.S. Can plicies in the tw cuntries be crdinated t reduce the trade imbalance withut adverse macrecnmic impacts r withut recurse t prtectinism? That is a central questin in ur simulatins belw.. The Baseline Frecast Slutin The mst recent versin f the NIRA-LINK mdel encmpassing the US, Japan, and the rest f the wrld ecnmy has been used fr these simulatins. As described in detail in Adams, Gangnes, and Shishid ( frthcming) this mdel cmprises the industrially disaggregated Whartn Annual and Industry Mdel (Whartn Lng-Term Mdel) fr the United States, the newest versin (G-) f the FAIS/IUJ Multisectr mdel fr Japan, and the LINK system f mdels fr the rest f the wrld. The United States and Japan are linked tgether thrugh disaggregated trade equatins, while the rest f the wrld retains the fur sectr disaggregatin f Prject LINK. This makes it pssible t evaluate the effects f plicies n the industry level in the US and Japan. As indicated in Figure, the United States and Japan mdels, full-fledged multisectr mdels with Lentief framewrk, are substituted fr Whartn Quarterly Mdel and Osaka University Macr Mdel, respectively, which are currently used in the Prject LINK system linking cuntries and regins thrugh fur trade matrices f SITC categries (-, -,, and -). As cmpared with ther glbal mdels, the mdel is unique in terms f the cntent f industry level disaggregatin f utput, emplyment, investment, prices, and trade fr the United States and Japan and its extensive cverage f cuntries and regins. The number f equatins, including the United States mdel (,) and Japan mdel (,) ttals abut,. The mdel system has been aligned n recent histrical data, supplemented with plicy and frecast assumptins, t prvide an apprpriate starting pint during the - perid fr ur simulatins ver the t frecast and simulatin hrizn. This baseline prjectin assumes plicies that are nw in place and it prjects frward Clintn Administratin plicies s far as they are presently knwn (February ). We began ur simulatins by develping a pre-clintn frecast. Then we added mdificatins due t plicies being prpsed by the Clintn Administratin. These plicies include: Increases in gvernment investment spending amunting t $ billin phased in ver t. Reductins in defense expenditures f $ billin, frm previusly budgeted levels, phased in ver the perid t. Shisihid and Nakamura () []. Earlier discussins f the mdel are given in Adams and Shishid ()[l] and Adams, Gangnes and Shishid ()[], () [], and () [].

4 Macrecnmic and Industry Level Implicatins,-. _ ( cuntries II II Japan multi-sectr ( sec.) U.S. multisectr ) ( sec.) Canada & i egins) U.K. France Other Regin r r Disaqqr. Trade US/Japan sec. Q&P Trade Exclud. US/Japan categries Q&P Exchange Rates Wrld Markets f Primary Cm. Q& P \ f y f Nte: Q&P dentes quantity and price Figure : Flw Chart f NIRA/LINK Mdel LINK. Additinal persnal incme taxes, raising the marginal rate n high incme peple (crrespnding t incme f $, r abve) by percentage pints, with a % surcharge n incmes abve $,. An increase in crprate incme taxes f percentage pints, frm % t %. Taxes n fuel, impsed gradually, and rising t apprximately $ billin by.(prspective taxes n tbacc and alchl have nt been included. They will be fully ffset by expenditures n health care.) Further reductins in US interest rates f apprximately basis pints as a result f the imprved budget utlk. Fr Japan, the baseline fllws clsely recent frecasts f the WEFA Grup and Prject The bjectives f this plicy scenari are t prvide mderate nninflatinary cyclical re cvery ver the t perid while at the same time making sme significant prgress tward budget balance. After the predictin f plicy becmes mre difficult since plicy makers react t the ecnmic envirnment prevailing. This is the standard prblem f lng term frecasting. Cnsequently the base slutin fr the ut years f the frecast, t, is fr an extensin f present plicies s lng as they d nt cause the ecnmy t deviate excessively frm the bjectives f mderate nninflatinary grwth. While we have sught a realistic baseline, this is a prjectin, nt a frecast. Nevertheless we have nt eliminated the natural cyclical tendencies f the mdel. Fr example, we see a substantial cyclical swing in. When we cnsider the impact f alternative plicies, we cmpute the difference between an alternative slutin and the baseline. In mst cases, the precise psitin f the baseline slutin will nt make a substantial difference in the impact effect btained.

5 Jurnal f Applied Input-Output Analysis, Vl., N., The principal dimensins f the baseline frecast are shwn in Table A t D. The fllwing are the ntable macrecnmic dimensins f the frecast: (In each case belw, Table A shws macrecnmic statistics fr the United States, Japan and wrld. Table B shws trade flws fr the US, Japan, and rest f the wrld regins. Table C summarizes ecnmic activity by the wrld regins. Table D summarizes industrial impacts n utput and emplyment in the United States and Japan. Fr the Baseline slutin, we shw the level values. Fr the alternative simulatins we shw nly the differences frm the Baseline, thugh we may refer t the levels in the text. All Tables are presented at the end f the paper.) Fr the United States: Shrt run ecnmic recvery fr the United States during t at an annual rate arund percent. t Cntinued expansin with sme cyclical variatin beynd between and percent annually. The deflatinary impact f deficit reductin becmes apparent particularly in the t perid. (An alternate simulatin that aimed at eliminatin f the deficit by, wuld drive the US ecnmy clse t recessin in the t perid.) The unemplyment rate falls gradually t percent and fluctuates near that level during the remainder f the frecast perid. Cntinued mderate inflatin between and percent during and, rising between and percent annually fr the remainder f the decade. t Deficit reductin amunting t $ billin between and. As we nte abve, this represents nly a partial redressment f the deficit, but it is prbably all that is attainable within the cnstraints f the GNP grwth plicy aims. After, the deficit declines further t a value f apprximately $ billin by the end f the decade. Trade statistics shw US exprts rising an average f apprximately percent in nminal terms ( t percent in real terms) thrughut the decade. US imprts rise a little mre rapidly s that the trade balance tends t wrsen gradually in nminal terms. Such a result may be difficult t avid if the US is t maintain the desired mderate rate f GNP grwth. At the industry level (Table D) this base slutin shws cyclical recvery fr the mst business cycle sensitive sectrs, fr example autmbiles, aircraft, cnstructin, electrical and nnelectrical machinery. Grwth f industry is smewhat slwer in the secnd half f the decade. Emplyment trends are a little less favrable that industrial expansin because f gains in pr ductivity, particularly during the cyclical expansin. Grwth f emplyment in services cntinues at a mderate rate, but there is n evidence that the US is becming a mre service riented ecnmy during this recvery perid. Fr Japan : The base slutin grwth rate is prjected at arund t percent per year beginning with a cyclical recvery in and then ver the frecast perid. The nrmal cyclical rebund is assisted by grwing exprts recvering ecnmies abrad. The trade balance cntinues t expand during the frecast with a gradual increase frm ver $ billin in t ver $ billin annually tward the end f the decade. This suggests the need fr plicies t reduce the trade surplus. After the cyclical slwdwn, industrial trends favr machinery, autmbiles, and ther high tech industries. With the exceptin f the machinery industry, gains in emplyment remain quite mderate. Fr the Rest f the Wrld: t Ecnmic activity n a wrld basis averages ut t a t. percent grwth path. Fr the ther industrial cuntries grwth is mderate at nly and a half percent annually, s that the baseline frecast, even with the Clintn plicies, assumes a fairly weak expansin during the t perid. Present plicies are nt sufficient t mve the industrial cuntries rapidly ahead, s that sme cncerted actin is needed. (See the Cncerted Actin Scenari belw.)

6 Macrecnmic and Industry Level Implicatins In the develping wrld, grwth averages abut percent per year, with Asia including China grwing even ne and half percentage pints faster. The frmerly planned ecnmies (ther than China) shw mdest grwth, at tw and a half percent, that represents a recvery frm recent experience. The mdel sees these cuntries returning t their frmer grwth path. Fr wrld trade this frecast prjects grwth in dllar terms f between and percent annually, with internatinal prices rising and a half t percent. All f the plicy scenaris reprted belw are run with this Baseline Frecast as their basis. As We have nted abve, this Baseline incrprates U.S. plicy changes recently prpsed by the Clintn administratin. T give an indicatin f the impact f the Clintn plicies themselves, Table reprts the differences between ur baseline and a "pre-clintn" frecast that excludes these plicies. The effects f these mderate Clintn plicies are: Fr the United States: The shrt-term stimulus package raises US GNP.% in, creating an additinal, jbs. t The spending cuts and tax increases reduce the federal budget deficit by mre than $ billin by the decade's end. The cntractinary effect f these plicies takes abut a half a percent ff GNP grwth in each f the years t, althugh there is sme rebund afterward due t falling interest rates. The weaker ecnmy mid-decade leads t mdestly smaller current accunt deficits, althugh the current accunt deficit is nly $ billin smaller by. Fr Japan : The relatively mdest Clintn fiscal package has a very small effect n Japan's ecnmy, with strnger exprt grwth leading t.% higher GNP mid-decade. t The cntractinary budget balancing plicies lead t a slight exprt-led grwth decline fr Japan later in the decade. Fr the Wrld : Effects n the verall wrld ecnmy are dminated by cntractin in the US. Wrld GNP is abut a half percent lwer than in the "pre-clintn" baseline by. Sme experiments with alternative plicy scenaris fr the United States have als been cmputed. Specifically in Table we shw the results f an Activist Cunter-cyclical Expenditure Plicy that has been prpsed fr the Clintn Administratin. This plicy scenari assumes an increase in and in US nndefense gvernment spending-public investments and ther types f "pump priming"-building up t $ billin in. As anticipated, this plicy has significant shrt run stimulus impacts, But the prblems with such a plicy are apparent: Fr the United States: t The increase in GNP f apprximately percent in and is fully ffset in subsequent years by a decline. In ther wrds the plicy leads t greater cyclical amplitude withut a lng run increase in ecnmic activity. Indeed, the secnd half f the s is a perid f slightly negative grwth. The deficit deterirates by almst $ billin fr an extended perid even beynd. The stimulus plicy has significant inflatinary impact and causes increases in interest rates, which explains the persistence f the negative effects after the stimulus has been eliminated in. The trade impacts attributable t the cyclical stimulus are quite small, thugh negative n bal ance.

7 Jurnal f Applied Input-Output Analysis, Vl., N., Fr Japan : The US stimulus shws an initial small psitive impact, but with the slwer expansin f the US later in the decade, Japan is als affected negatively at that time. Fr the Wrld Ecnmy: The effects f the US stimulus are quite small,. t.%. The US ecnmy is nt pwerful enugh at this time t act as a lcmtive fr the rest f the wrld. An alternative simulatin was als run with respect t balancing the budget in a relatively shrt perid. This alternative has nw becme unlikely and s these calculatins are nt pre sented here. Balancing the budget by, a majr effrt, wuld yield cnsiderably less favrable utcme frm the perspective f prductin and emplyment with little gain in inflatin r in terest rates. The ecnmy wuld be back near grwth recessin levels, with grwth between and. percent per year in. Hwever, such scenaris d yield sme imprvement in the trade balance, since U.S. imprts are sensitive t ecnmic activity. Mrever, interest rates wuld be yet a little lwer, setting the stage fr a recver later in the decade.. Trade Imprvement Scenaris A variety f pssibilities exist fr imprvement f the Japanese trade balance, reducing the large disequilibrium f Japanese trade particularly with respect t the United States. It is nt clear, hwever, by what means the trade balance imprvement shuld be intrduced and hw substantial an imprvement is achievable. The pssibilities that culd be cnsidered are:. Macrplicy changes designed t accelerate grwth in Japan and t slw grwth in the United States. (This ptin seems rather limited in view f plitical cnstraints.). Exchange rate changes. (A realignment f the yen exchange rate is included in several f the simulatins that fllw.). Vluntary exprt restraint agreements. (Simulatins f VERs have been cnsidered in an earlier paper (Adams, Gangnes, and Shishid, June, ).. Prtectinism in the US and in Eurpe.. Imprt incentives in Japan. Sme cmbinatins f plicies, fr example an ecnmic stimulus package with a revaluatin f the yen and specific imprt incentives, are pssible prspects. Our primary attentin in the Imprt Stimulus Scenari will fcus n an expansin f Japanese imprts as a result f gvernment plicy favring imprts. Such plicies can take the frm f publicity campaigns but culd als take the frm f imprt incentives t cnsumers, investrs, and public agencies. In an alternative simulatin belw we have cmbined direct imprt stimulus with ther expansinary macr plicies... Imprt Stimulus Plicy The assumptins f ur imprt stimulus plicy scenari are as fllws. On the industry level, we have assumed explicit increases in Japanese imprts in the aggregate, frm the United States, and by particular industries: The aggregate imprt increases amunt t apprximately current $ billin with abut $ billin f that frm the United States. (See appendix Tables A and B.) These increases have been allcated acrss industries as shwn in appendix Tables A and B.

8 Macrecnmic and Industry Level Implicatins The results f this simulatin n the macr and fr trade are shwn in Tables A t D. The principal salient pints are the fllwing: Fr the United States: t An imprvement in GNP f almst percent during the mid s. a This prduces apprximately a ne half percent decline in the unemplyment rate. An imprvement f the US trade and current accunt balances f sme $ billin (current). Fr Japan: The impact n the Japanese ecnmy is substantially negative prducing an almst percent reductin in real GNE. Hwever, the impact n unemplyment is quite small reflecting the insensitivity f emplyment t ecnmic activity in Japan. There is substantial reductin in the persnal cnsumptin deflatr,. t percent in the mid s. Fr the Wrld: There is little impact n wrld ecnmic activity amunting t nly. t. percent f GDP. t Wrld trade is, hwever, a little ver percent higher. On the industrial level (Table D), the effects are nticeable particularly in the industries affected directly, thugh indirect effects are als apparent. The principal results are: Fr the United States: Significant increases in ecnmic activity in a wide f range industries. Impacts are particularly apparent in Autmbiles, Aircraft, and Electrical Machinery. Fr Japan: Industrial impacts are largely negative and particularly negative fr thse industries gaining in the United States... Mixed Imprt Stimulus Scenari In view f the sharply negative impacts f imprt expansin n the Japanese ecnmy, it seems apprpriate t intrduce anther simulatin that wuld include ffsetting plicies in Japan. This scenari, the Mixed Imprt Stimulus scenari, adds stimulative macr plicies t the Imprt Stimulus Scenari cnsidered abve. The added stimulus t the Japanese mdel is as fllws:. a ten percent revaluatin f the Japanese yen with respect t the United States dllars,. a cyclical expenditure stimulus package in Japan f billin () yen, and. a percentage pint reductin in the Japanese discunt rate. The results f this calculatin are summarized in Tables A t D. The principal results f this calculatin are as fllws: Fr the United States: The impact is similar t that btained in the Japan Imprt scenari, a temprary increase in GNP f up t ne percent. The imprvement f the US trade balance with respect t Japan rises t sme $ billin. While the measures described are substantial in magnitude and have apprpriate effects, the Japanese trade balance with respect t the United States is still nt quite brught int balance. Certain industries are hwever significantly affected, particularly autmbiles, aircraft and ma chinery.

9 Jurnal f Applied Input-Output Analysis, Vl., N., Fr Japan: The plicy stimulus f this slutin substantially returns the level f Japan's real utput t the base slutin level, ffsetting the negative impact f the imprt expansin. t The trade balance is cnsiderably affected, as anticipated, thugh a substantial surplus remains. t Industrial impacts are very imprtant since autmbiles, machinery and ther industries that direct a large part f their prduct t fields where there is cmpetitin frm US suppliers are negatively affected, while there is sme ffset by industries that gain frm the Japanese plicy stimulus. T summarize, increases in Japanese imprts are clearly a way t redress the Japanese trade balance. But the prblem is that such stimulus t imprts is likely t have damaging impacts n Japanese industries, particularly thse that prduce imprt-cmpeting prducts. Fr this reasn ffsetting imprt increases with fiscal r mnetary plicy is necessary. Even s, uneven industrial impacts and changed cmpsitin f industry utput may call fr substantial readjustments.. Internatinal Cncerted Actin Scenari As we have nted abve, the pr perfrmance f many f the wrld's industrial ecnmies suggests the need fr a Cncerted Actin Scenari that assumes a jint systematic effrt n the part f the G- cuntries t imprve the glbal ecnmy. This scenari, like the ther alternative scenaris, begins with the same assumptin as the baseline. The nly changes intrduced are thse necessary t characterize the plicy alternatives. This means that a cmparisn between the alternative and the baseline simulatin measures the plicy impact. The tables (Tables A t D) shw differences between the alternatives and the baseline simulatin. Internatinal cncerted actin is here intended t mean systematic effrts by the G- cun tries t emply macrecnmic plicy-particularly fiscal, mnetary and exchange rate plicy-t imprve the jint utcme fr all the members f the grup. The plicy exercise is fcused n the - perid, thugh plicy changes during this time may be extended and will surely affect the utcme later in the decade. On the basis f widespread discussin f the plicy measures necessary t advance the industrial ecnmies, we have assumed that a reasnable cncerted actin scenari wuld cntain the fllwing principal elements: t Significant additinal increases in gvernment spending n investment in the United States, Japan and Eurpe. The spending increase fr the United States is $ billin. Fr Japan, we have assumed an additinal billin () yen increase in gvernment investment. Significant reductin in interest rates in Eurpe, particularly in Germany. A percentage pint reductin in interest rates has been assumed. That leaves interest rates in Eurpe at the t percent level, still abve thse prevailing in the United States and Japan. As a result f lwer interest rates in Eurpe, we have allwed fr a further ne percentage pint reductin in interest rates in the United States, and an additinal ne percentage pint decline in the Japanese discunt rate. t With respect t exchange rates, the simulatin assumes a percent appreciatin f the Japanese yen with respect t the US dllar and Eurpean currencies. N adjustment have been made fr Eurpean currencies with respect t the US dllar. The results f internatinal cncerted actin are summarized in Table A. The principal cnclusins with respect t macrecnmic perfrmance are as fllws: Fr the United States: There is substantial imprvement in US GNP, amunting t percent ver much f the frecast perid. t Unemplyment is reduced by t. percentage pints.

10 Macrecnmic and Industry Level Implicatins The stimulus has sme adverse effect n inflatin, adding an additinal ne percent t the annual inflatin rate. t While US exprts increase by up t percent at the end f the decade, imprts rise still mre rapidly reflecting the high sensitivity f US imprts t ecnmic activity. The result is a substan tial increase ($ billin) in the US nminal trade balance deficit by. Mst f this impact is nt, hwever, with Japan. Fr Japan: The Japanese ecnmy shws an imprvement in real GNE f t percent, a little smaller at the start than in the US. Interestingly, the imprvement in ecnmic activity cmbined with slwer inflatin, reflecting the upward valuatin f the yen. Japanese exprts shw significant increase and s d Japanese imprts. But the Japanese trade balance remains nly mderately affected. Fr the rest f the wrld: Effects n the wrld ecnmy are als favrable and substantial, amunting eventually t. percent f wrld GDP. The effects are greater n the industrial cuntries than n the develping cuntries. t Wrld trade is increased gradually by apprximately percent. The industrial effects f this scenari (Table D) are: In the United States: t As anticipated, the impacts n industry are bradly based. The greatest gains are t the au tmbile, aircraft, and machinery industries and t their suppliers like rubber and steel. These industries shw substantial expansin, up t percent. Emplyment effects are mre mderate, but again in these relatively high-paying industries. Fr Japan: Psitive industrial effects are smewhat less prnunced than fr the United States and scattered ver a wider range f industries. Here t metals related industries shw the greatest gains.. Emplyment effects in Japan are unifrmly much smaller than in the United States. Our experiments with internatinal cncerted actin scenaris shw that there is ptential fr imprving utcmes n an internatinally cperative basis, but the ptentials f such plicies shuld nt be exaggerated because ) such cperatin is difficult t implement, and ) the results are quite mdest.. Overseas Develpment Assistance (ODA) Scenari The large Japanese trade surplus suggests the pssibility that Japan might prvide substantial assistance t cuntries that are shrt f capital, particularly the lw incme develping cuntries. Our interest is t see the impact f Overseas Develpment Assistance n the Japanese ecnmy and n the ther industrial cuntries. Because f the inadequacy f sme f the mdels fr the recipient cuntries in ur versin f the NIRA-LINK system, it is nt pssible t evaluate clearly the impact n the recipient cuntries, s that we have made assumptins abut their grwth as a result f freign assistance. The basic assumptins f the ODA Simulatin are: An allcatin f $ billin in real terms ( prices) f additinal ODA payments by Japan ver the entire frecast perid. In nminal terms the allcatin grws mderately ver the perid.

11 Jurnal f Applied Input-Output Analysis, Vl., N.,. Increase in investment by ne percent f GDP in each f the recipient cuntries: India, Philip pines Thailand, Indnesia, Malaysia and the frmer Sviet Unin.(Technical difficulties precluded simulatin f assistance t China and the nn-sviet Eastern Eurpean cuntries.) This increase appears t crrespnd apprximately t the capital cntributin made under the new ODA plicy. Its impact n the grwth f GDP in the cuntries is endgenusly determined by the respective mdels. The effects f the ODA scenari (Tables A t D) can be summarized as fllws: Fr the United States: The effects n ecnmic activity are very small, nt surprisingly since they wuld be by way f third parties wh are generally nt primary trading partners with the US. The gain in US exprts amunts t nly $ billin. Fr Japan: The macrecnmic impact is, like fr the United States, very small. There is smewhat surprisingly nly little effect n Japanese exprts. There is an imprvement f the Japanese current accunt f sme $ billin that has been prgrammed in as the ODA cntributin. Fr the wrld ecnmy: t The increase in nminal imprts f the wrld ecnmies amunts t apprximately ne half f the increase in Japanese ODA. t Mrever, the develping ecnmies, which benefit frm the verseas assistance, increase imprts by nly ne quarter f the ODA allcatin, t The shrtfall between aid and imprts nted abve culd, f curse, represent a substitutin f ODA fr brrwing that wuld have therwise supprted imprts f the ODA beneficiary cuntries. There remain sme serius questins n hw the mdel handles an ODA cntributin. The difficulties invlve first the determinatin f imprts in the recipient cuntries. These presumably shuld have increase by substantially the full amunt f the ODA receipts. There is secndly a questin f hw the ODA was allcated between cnsumptin and capital gds, determining its impact n grwth. Finally there is a serius questin f whether the trade matrixes in LINK prperly describe the gegraphic surcing f the imprts purchased with develpment aid. At the very minimum, even if the aid is allcated withut gegraphic surce restrictins, the current trade matrix prbably des nt prvide a very accurate picture f the gegraphic allcatin f imprts bught by develping cuntries thrugh develpment assistance.. Cnclusins This memrandum has summarized numerus simulatins with the NIRA-LINK mdel system. This integrated disaggregated wrld mdel system, with special emphasis n Japan and the United States, has made pssible an evaluatin f a number f currently relevant alternative plicy scenaris. A baseline scenari analysis has included plicies recently prpsed by the Clintn Admin istratin in the United States. This scenari, which recrds the recent swing tward recvery in the United States, suggests that Clintn Administratin plicies will be mderately successful at maintaining grwth and at achieving a partial imprvement in the budget deficit. Our analysis suggested that an activist cunter cyclical plicy at this time wuld have temprary psitive results, but wuld leaving the US ecnmy in a smewhat mre adverse cyclical psitin later in the decade. We have impsed n the baseline slutin a variety f alternatives. We summarize these simulatins briefly here.

12 Macrecnmic and Industry Level Implicatins Increased Japanese imprts. The assumptin f significantly increased Japanese imprts has nly mderate impact n the United States ecnmy, Hwever, it has substantially adverse impacts n the Japanese ecnmy. Only with additinal ffsetting public spending and mnetary easing can such an increase in imprts be accmmdated with cntinued high level f activity in Japanese industry. The cncerted actin scenari. Cmbined stimulus plicies n the part f the G- have cnsiderable prmise t imprve wrld ecnmic activity. The United States, Japan, the ther industrial cuntries, and t a smewhat lesser extent the develping cuntries, benefit significantly frm cncerted plicy effrts. These pssibilities deserve further study. The ODA scenari. Simulating the effects f additinal Japanese ODA assistance pses sme prblems in the cntext f the NIRA LINK system. While there is impact n the develping ecnmies and n the Japanese current accunt balance, it is nt clear that the full impacts f trade are being captured. The NIRA-LINK mdel system has prvided a tl fr detailed wrld wide plicy analysis. We are grateful t the riginal authrs f the mdels, t Prject LINK, and t NIRA fr supprting this mdeling effrt.

13 Table A: U.S., Japan, Wrld Macr Summary / MAXICLN: MODERATE %dii UNITED STATES! GNP ($ billin) Nminal GNP ($b) CPI Emplyment (ril) Unemply Rate (%) -M CO Rate (%) Fed Surplus ($b) Current Acct($b) W.A. $ Exch Rate : ***«. Z Pera Cns Exp Bua Fixed Invest Residential Invs Ch Bus Invent Net Exprt G&S Exprt Gvt Purch G&S.....( i -..! > >... > JAPAN: GNE (Y billin) Nminal GNE (Yb) Pera Cns Def Emplyment(X) Unemply Rate (%) Bank Lends Rate(%) Gvt Surplus (Yb) Current Acct ($b) Y/$ Exchange Rate... L..] L.. L..' >..: L. -.^ I -.. L -..( ) Cnaumptn-Privt Cna-Nnprfit Cns-Gvernment Investment-Buan Invea-Residentl Inves-Gvernmnt Inventry-Privt Invt-Gvernment Net. <.. (.J....«.... L L. \ ***** ) ***** ***** WORLD: Real GNP Real Nml ($b) Ntes: Figures are levels and annual grwth rates in billins f yen (Japan), billins f dllars (US), and billins f dllars (Wrld), unless indicated! lxxj-nb r ***** dentes % change ver three digits. CLINTON BASELINE (/) kdif , kdif % -a c O c a c *"* > *<* < O!~~ r~ _^ Kj u i "*

14 Table IB: Wrld, and Trade s (f..b.) Prject LINK - University f Pennsylvania / MAXICLN: MODERATE CLINTON BASELINE (/) United States Japan Ireprt Other Industr. Cuntries Canada Australia, N.Z. EC Exprt Develping Cuntries Exprt Aaia incl China Western Hemisphere C.P.E. excl China Stat. Diecrep. Wrld Wrld Exprt Price Wrld real B %chg %chg *** %chg Billins f U.S %chg. $ **..... * \chg %chg %chg %chg ** Billins Of U.S. $ %chg *** %chg p C

15 Table C: Wrld Grss Natinal Prduct ( U.S. $) Prject Link - University f Pennsylvania / MAXICLN: MODERATE CLINTON BASELINE (/) Mean U.S. Japan Other Indust. Cuntries Canada Australia, N.Z. EC Rest f Industrialized Develping Cuntries OPEC Africa Asia incl China Middle East nn-il Western Hemisphere C.P.E. excl China..... Wrld ttal..... Mean U.S. Japan Other Indust. Cuntries Canada Australia, N.Z. EC Rest f Industrialized Grwth Rates Develping Cuntries OPEC Africa Asia incl China Middle East nn-il Western Hemisphere C.P.E. excl China..... Wrld ttal.....

16 Table ID: U.S., Japan Industry Detail, Selected Industries / MAXICLN: MODERATE CLINTON BASELINE (/) Mining, Metl Textiles Rubber,Plast Irn & Steel Fabr Metal Nnel raachin Elect Machin Autmbiles Aircraft Util, Elec Whlal, Retl Manuf. Tt. Dur. Dur, Dur Dur Dur Elec & El Mach excl B Mtr Vehic Fab Metal Pri Metal Nndur, Rubber & Transp Services Whlsale & Retail All Priv sec Rubber Prducts Petrleum Prds R,Cast,Frge Oth Nnferrus Metal Prducts Machinery Electr Machinry Autmbiles Indus Cnstruct Electric Pwer Whlele & Retail Finance & Inar Ttal Natural Textile Rubber Prds Cement Oth Nnferr Met Metal Prds Machinery Elec Machnry Mtr Vehicles Husing Trucks & Buses Ttal %dl %di %dl S ,,,,,,..,.,,,,,.. United States: Grss Output S United States: Emplyment Japan: Grss Output ,......, Ntes: Figures are levels and annual grwth rates. Japan: Emplyment ,,,, (Y millin) (thusands) United States: Emplyment '_ lf %dlf Japan: Grss Output Japan: Emplyment ,.,,,.,.,,,,.,,,,, (Y millin) -.. L.... * I'.O (thusands), xt O\

17 Table : U.S., Japan, Wrld Macr Summary / MAXICLN: MODERATE CLINTON POL EFFECTS (/) UNITED STATES: GNP ($ billin) Nminal GNP ($b) CPI Emplyment (mil) Unemply Rate (%) -M CD Rate (%) Fed Surplus ($b) Current Acct($b) W.A. $ Exch Rate Pers Cns Exp Bus Fixed Invest Residential Invs Ch Bus Invent Net Exprt G&S Gvt Purch G&S JAPAN: GNE (Y billin) Nminal GNE (Yb) Pers Cns Defl Emplyment(X) Unemply Rate (%) Bank Lendg Rate(%) Gvt Surplus (Yb) Current Acct ($b) Y/$ Exchange Rate Cnsumptn-Privt Cns-Nnprfit Cns-Gvernment Investment-Busn Inves-Residentl Inves-Gvernmnt Inventry-Privt Invt-Gvernment Net WORLD: Real GNP Real Nml ($b) -... ' %di %di Ill Ntes: Figures are deviatins and percent deviatins frm the baseline slutin in billins f yen (Japan), billins f dllars (US), and billins f dllars (Wrld), unless indicated.

18 Table : U.S., Japan, Wrld Macr Summary / MAXICLBG: ACTIVIST CLINTON SENARIO (/) UNITED STATES: GNP ($ billin) Nminal GNP ($b) CPI Emplyment (mil) Unemply Rate (%) -M CD Rate (%) Fed Surplus ($b) Current Acct($b) W.A. $ Exch Rate Pera Cns Exp Bus Fixed Invest Residential Invs Ch Bus Invent Net Exprt G&S Gvt Purch G&S JAPAN: GNE (SOY billin) Nminal GNE (Yb) Pera Cns Defl Emplyment(X) Unemply Rate (%) Bank Lendq Rate(%) Gvt Surplus (Yb) Current Acct ($b) Y/$ Exchange Rate Cnsumptn-Privt Cns-Nnprfit Cns-Gvernment Investment-Busn Invea-Residentl Inves-Gvernmnt Inventry-Privt Invt-Gvernment Net WORLD: Real GNP Real Nml ($b> t Ntes: Figures are deviatins and percent deviatins frm the baseline Blutin in billins f yen (Japan), billins f dllars (US), and billins f dllars (Wrld), unless indicated.

19 Table A: U.S., Japan, Wrld Macr Summary / MAXIA: INCR JAPANESE IMPORTS (/) UNITED STATES: GNP ($ billin) Nminal GNP ($b) CPI Emplyment (mil) Unemply Rate (I) -M CD Rate (%) Fed Surplus ($b) Current Acct($b) W.A. $ Exch Rate Pers Cns Exp Bus Fixed Invest Residential Invs Ch Bus Invent Net Exprt GSS Gvt Purch G&S JAPAN: GNE (Y billin) Nminal GNE (Yb) Pers Cns Defl Emplyment(X) Unemply Rate (%) Bank Lendg Rate(%) Gvt Surplus (Yb) Current Acct ($b) Y/$ Exchange Rate Cnsumptn-Privt Cns-Nnprfit Cns-Gvernment Investment-Busn Inves-Residentl Inves-Gvernmnt Inventry-Pr ivt Invt-Gvernment Net WORLD: Real GNP Real Nml ($b) ***** ***** B **** ! ***** bdif < Ntes: Figures are deviatins and percent deviatins frm the baseline slutin in billins f yen (Japan), billins f dllars (US), and billins f dllars (Wrld), unless indicated. * " dentes % change ver three digits.

20 Table B: U.S., Japan, Wrld Merchandise Trade Summary / MAXIA: INCR JAPANESE IMPORTS (/) United States: t Japan frm Japan Japan: t U.S. frm U.S. Other Indust. Ctries. EC Develping Cuntries Asian NIEb C.P.E. excl. China Wrld: Real Exprt ($b) NOTES: Figures are deviatins and percent deviatins frm the baseline slutin in billins f current dllars.

21 * Table C: Real Wrld Grss Natinal Prduct (Bill. U.S. $) / MAXIA: INCR JAPANESE IMPORTS (/) %chg %chg %chg %chg %chg %chg %chg %chg U.S. Japan Other Indust. Cuntries Canada Australia, N.Z. EC Rest f Industrialized < Develping Cuntries OPEC Africa Asia incl China Asian NIEs Western Hemisphere * Q..... *... C.P.E. excl China Wrld Ttal NOTES: Figures are deviatins and percent deviatins frm the baseline slutin in billins f dllars.

22 Table D: U.S., Japan Industry Detail, Selected Industries / MAXIA: INCR JAPANESE IMPORTS (/) Mining, Metl Textiles Rubber,Plast Irn & Steel Fabr Metal Nnel machin Elect Machin Autmbiles Aircraft Util, Elec Hhlsale, Retl Manuf. Tt. Dur, Elec & El Dur, Mach excl E Dur, Mtr Vehic Dur, Fab Metal Dur, Pri Metal Nndur, Rubber & Transp Services Whlsale & Retail All Priv Sec Rubber Prducts Petrleum Prds Rll,Cast,Frge Oth Nnferrus Metal Prducts Machinery Electr Machinry Autmbiles Indus Cnstruct Electric Pwer whlsle & Retail Finance & Insr Ttal Natural Textile Rubber Prds Cement Oth Nnferr Met Metal Prds Machinery Elec Macnnry Mtr Vehicles Husing Trucks & Buses Ttal llll kdif *^if _ I United Statest States: Grnn Grss nufmit- Output tfic minu«\..._.. ($ millin) ! !s ! l!g. United. States: Emplyment. (thusands) Japan: Grss Output Japan: Emplyment Ntes: Figures are deviatins and percent deviatins frm the baseline slutin.. an.ft (Y millin) (thusands) ^ !.!!...! i i S

23 Table A: U.S., Japan, Wrld Macr Summary / MAXI : MIXED JA IMPORTS STIMULUS (/) UNITED STATES: GNP ($ billin) Nminal GNP ($b) CPI Emplyment (mil) Unemply Rate (%) -M CD Rate (%) Fed Surplus ($b) Current Acct($b) H.A. $ Exch Rate Pers Cna Exp Bus Pixed Invest Residential Invs Ch Bus Invent Net Exprt G&S Gvt Purch G&S JAPAN: GNE (Y billin) Nminal GNE (Yb) Pers Cns Deri Emplyment(X) Unemply Rate (%) Bank Lendg Rate(l) Gvt Surplus (Yb) Current Acct ($b) Y/$ Exchange Rate Cnsumptn-Privt Cns-Nnprfit Cns-Gvernment Investment-Busn Inves-Residentl Inves-Gvernmnt Inventry-Privt Invt-Gvernment Net WORLD: Real GNP Real Nml (Sb) , ***** ***< > * ***** *** -,... k* ***** ***** kdif ** * * * kdif ** * * * ***** Ntes: Figures are deviatins and percent deviatins frm the baseline slutin in billins f yen (Japan), billins f dllars (US), and billins f dllars (Wrld), unless indicated. dentes % change ver three digits. < :