Simulation Analysis of Macroeconomic Impact of Large Scale Earthquake in Tokyo (in Japanese)

Motohiro Sato and Kazumasa Oguro

Economic Analysis, 2011, vol. 184, 122-139

Abstract: The present paper considers a simple (Keynesian) macroeconomic model to quantify impacts of the large scale earthquake in Tokyo on national economy variables such as economic growth, price level, interest rate, fiscal balance by Monte Carlo simulations. In doing so, we account for the current situation of Japan public finance and society such as increasing public debt ratio to GDP and aging of the population. The simulations reveal that while GDP falls immediately after the disaster, there will be quick recovery restructuring projects boosting the economy. Overall, the impact of the earthquake on the economy seems to be limited. The reason behind this result is that our staged economy with society aging damps supply decline and increasing macro demand after the disaster with keeping GDP gap modest. It is noted however that the large scale earthquake increases probability that interest rate surges and government goes bankrupt with public debt being accumulated. The probability of the fiscal crisis in the year of 2020 is estimated to jump up from 12% without the earthquake to 43% in the scenario that it occurs in 2015. We also discuss ex ante preventive policies to mitigate detrimental effects of the disaster. They include captive, or fund for disaster relief and fiscal consolidation. These policies serve to mitigate the perverse effect of the earthquake on the economy.

Date: 2011
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Working Paper: Simulation Analysis of Macroeconomic Impact of Large Scale Earthquake in Tokyo(in Japanese) (2010)
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