Changes in Regional Economy

Abstract

The Central Research Institute of Electric Power Industry (CRIEPI) has developed a multiregional econometric model covering the nine regions of Japan to analyze the impacts of the national economy and fiscal policies on the regional economy. This model is called the JNREM (Japanese Nine-region Econometric Model). The model is multi-sectoral and linked with the national model developed by CRIEPI. The JNREM determined local output, investment, consumption, employment, wages, unemployment, population, electricity demand and so forth. With the other models of CRIEPI such as the World Energy Market Model, the Japanese Macro-economic Model and the Japanese Energy Model, the JNREM can offer the comprehensive prediction of Japanese regional economies which is consistent to that of the national economy, energy demand and the world energy market.The model has the following characteristics. First, it is multi-sectoral so that not only economic behavior of each region is analyzed by sector but interaction among sectors in each region is treated. Second, the JNREM is so cautiously built that it is possible to determine all endogenous variables for the national economy and the regional economies. This property is especially important in forecasting the behavior of interregional migration and of manufacturing investment. Third, the capital utilization rate is employed in manufacturing production to reflect adjustment process in the manufacturing sector. The ratio of actual demand for electricity (kilo-watt hours) to the contracted amount of electricity (kilo-watts) is used as a proxy for the capital utilization rate. Fourth, in sharp contrast with the previous multiregional models of Japan, regional unemployment is explicitly included in the model. This enables us to analyze the adjustment process of demand-deficient unemployment, which is sensitive to business fluctuations in local labor markets along the Phillips-type wage equation. Finally, the model reflects the differences in the production structures across sectors. Manufacturing outputs are mainly determined by supply-side factors such as capital and labor inputs, and technical progress. On the other hand, demand-related factors such as consumption and housing investment mainly determine outputs in the tertiary and construction sectors.For the period from 1985 to 2005, simulation analysis of four scenarios is carried out wiht the JNREM to examine the behavior of the entire model and impacts on regional economies of key exogenous variables such as oil prices, regional price index, and regional allocation of public investment. The impacts of these exogenous variables are examined in comparison to the standard scenario which is based on the forecasting results of CRIEPI's macro-economic model and the world energy model.In the standard scenario, Kanto has the highest growth rates of gross product and population. Compared with the standard case, high energy cost decreases output growth in each region. Concentration of labor and capital in the Tokyo metropolitan area, which is depicted in the model as rapid rise in price index of Knato, diminishes labor migration from other regions to Kanto, and reduces the difference in income between Kanto and others. The increase in regional share of public investment for preipheral regions narrows earnings and unemployment gaps between peripheral and central regions. However, intensive allocation of public investment to peripheral regions brings about less national production, and this indicates the trade-off between efficiency in terms of the national economy and equity among central and peripheral regions in terms of economic defferences between two groups of regions.