Effects of restoration measures from the east Japan earthquake in the Iwate coastal area: application of a DSGE model

• Published in: Asia-Pacific journal of regional science Vol. 2; no. 2; pp. 317 - 335
• Main Author: Kunimitsu, Yoji
• Format: Journal Article
• Language: English
• Published: Singapore Springer Singapore 01.08.2018
• Subjects: Asian Economics; Economic Theory/Quantitative Economics/Mathematical Methods; Economics; Economics and Finance; Regional/Spatial Science; R11; E32; R13; Chronological nonconformity between production and consumption; Fund transfer; Rebuilding subsidy; Cost–benefit ratio; Restoration investment
• ISSN: 2509-7946; 2509-7954
• DOI: 10.1007/s41685-017-0055-z

Restoration investment after an earthquake and tsunami can improve regional production, but effects of investment emerge differently in production, investment and consumption. Conventional economic models cannot reproduce such chronological nonconformity among economic indices. This study aims to analyze whether the dynamic stochastic general equilibrium (DSGE) model can duplicate the chronological restoration path and nonconformity, and quantifies the efficiency of the restoration measures, such as restoration investment with fund transfer and rebuilding subsidy, in the Iwate coastal region, where the east Japan earthquake hit. The analytical results are as follows: (1) consumption after the earthquake follows a hump-shaped path, where peak point of consumption was delayed from production peak, but then recovered; (2) private investment and labor demand decrease by more than self-restoration does when the restoration measures end; and (3) restoration investment with fund transfer and rebuilding subsidy improves the economy by accelerating the reconstruction of damaged capital stocks, and the benefits of these two measures outweigh their respective costs. These findings show that the influence of an unforeseen and disastrous earthquake can be explained well by the forward-looking decisions on consumption and savings (equal to investment) endogenizing in the DSGE model.