Introduction to the Financial Macro-econometric Model

This paper introduces the Financial Macro-econometric Model (FMM) being developed by the Bank of Japan. The FMM is a medium-sized structural model comprising two sectors: a financial sector and a macroeconomic sector. It permits the quantitative analysis of various phenomena created by the feedback loop between the financial economy and the real economy. The model's most distinctive feature, which is rarely observed in this type of model, is seen in the financial sector, where we model the actual risk management behavior of banks. It facilitates macro stress testing and allows the robustness of the financial system and its effects on the macro economy to be consistently verified from various perspectives.