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  • Pohjola, Tapio (2002)
    Bank of Finland. Discussion papers 14/2002
    This paper deals with the interaction of fiscal and monetary policy when the central bank is pursuing a price stability-oriented monetary policy.In particular, we study the durability of the price stability regime when public debt accumulates as a result of ultimately unsustainable deficits.The growth of indebtedness causes the collapse of the price stability regime after a period of rising deficits.The budget deficit is endogenously determined in the model, as a result of government's decisions on how to finance its expenditure.The alternative methods of finance are taxes, debt, and seigniorage.Under the price stability regime, only the first two methods are available, but in the long run taxes and seigniorage are the only alternatives.The price stability regime collapses when the public debt reaches an edogenously determined threshold, which makes reneging on price stability as attractive as accumulating more tax burden for the future.We are able to solve for the critical level of debt, the timing of the collapse, and the reaction of taxes to the collapse of the price stability regime. The critical level of debt depends, inter alia, on the level of government consumption, the real interest rate, the velocity of money, and the efficiency-effects of taxation.The results are illustrated by several numerical simulations. Key words: inflation, fiscal policy, fiscal theory of inflation, Stability and Growth Pact
  • Railavo, Jukka (2003)
    Bank of Finland. Discussion papers 34/2003
    In this paper we introduce an application of the supply-side channel for fiscal policy to the basic New Keynesian model.We use a proportional tax rate instead of lump sum tax and introduce the distortions of a tax wedge.We derive a closed economy forward-looking model with government consumption and no capital. Households' labour supply decisions are endogenised.Monetary policy is conducted by a Taylor-type interest rate rule and fiscal policy follows a simple debt rule.We analyse the stability of the model when fiscal policy has both demand and supply-side effects and compare results with the standard case of only demand effects. We show that taking supply-side effects into account restricts the fiscal policy parameter range consistent with the dynamic stability of the economy.We also argue that allowing fiscal policy to affect both supply and demand results in more persistent inflation as well as output responses to shocks, than without the supply-side channel.We also discuss the different monetary and fiscal policy regimes and their implication on the stability of inflation and output. Key words: inflation, fiscal and monetary policy, stabilisation JEL classification numbers: E52, E31, E63
  • Hyytinen, Ari; Takalo, Tuomas (2000)
    Suomen Pankin keskustelualoitteita 10/2000
    Transparency regulation aims at reducing financial fragility by strengthening market discipline.There are however two elementary properties of banking that may render such regulation inefficient at best and detrimental at worst.First, an extensive financial safety net may eliminate the disciplinary effect of transparency regulation.Second, achieving transparency is costly for banks, as it dilutes their charter values, and hence it also reduces their private costs of risk-taking.We consider both the direct costs of complying with disclosure requirements and the indirect transparency costs stemming from imperfect property rights governing information and specify the conditions under which transparency regulation can (and cannot) reduce financial fragility. Key words: information disclosure, market discpline, bank transparency, deposit insurance, financial safety net
  • Snellman, Jussi (2000)
    Suomen Pankin keskustelualoitteita 19/2000
    During the 1990s the availability of location-specific retail payment services in Finland declined substantially, but at the same time there was a surge of development of self-service methods. These new methods, which make use eg of mobile phones and the Internet, dramatically increased the availability of payment services that are not tied to location.More traditional forms of payment still exist; for example, the use of cash remains significant.In Europe there are marked differences between countries with respect to the use of different payment methods. Generally, the use of cashless payment instruments has increased during the last ten years, but it seems that payment patterns are still not converging to similar structures. The development of the Finnish retail payment system has long roots, and several factors - eg the salary bank arrangement of the 1960s and the severe banking crisis of the early 1990s - have influenced the development of the current Finnish payment system. In the retail payments area, new technologies are developing rapidly.The success of new forms of payment (based eg on mobile phones) in gaining general acceptance may depend on changes in the nature of consumption.If customer demand increasingly shifts toward virtual goods and services, the demand for new types of payment methods such as electronic money may increase substantially. Keywords: retail payments, electronification, ATMs, Internet banking
  • Valckx, Nico (2001)
    Bank of Finland. Discussion papers 13/2001
    This paper examines what factors move US and European stock and bond markets, extending earlier work by Campbell and Ammer (1993). Inflation news is incorporated into the stock and bond decomposition and explicit attention is given to different horizons over which expectations are formed.Sensitivities to monetary policy instruments and fundamental factors are examined. The data are monthly.For the euro area, a unique data set is constructed.The results illuminate a number of widely-held pre-conceptions and confirm that inflation news volatility is a non-trivial factor in the stock and bond return decompositions. Key words: stock prices; bond prices; return decompositions, fundamental factors
  • Sierimo, Carolina; Virén, Matti (1995)
    Bank of Finland. Discussion papers 34/1995
    This paper examines the relationships between financial and nonfinancial variables in three Nordic countries (Finland, Norway and Sweden).We try to find out whether there exists some kind of dichotomy between these two sets of variables, both in terms of levels of variables and the respective volatilities.In particular, we scrutinize the role of the stock market (stock prices and stock market turnover) in this respect.The analysis makes use of standard time series analytical tools, cointegration analysis, analysis of Granger causality and cross-spectral analysis.The results of these empirical analyses suggest that, although the behaviour of the financial variables has been quite similar, there are important differences between these three countries.Still, in all countries important relationships between these sets of variables are detected.However, in most cases causality seems to be bidirectional or instantaneous.
  • Kanniainen, Vesa; Leppämäki, Mikko (2002)
    Bank of Finland. Discussion papers 5/2002
    The paper shows that uninformed finance gives rise to excessive entry, both in human-capital-intensive and in conventional industries when the financial institutions cannot identify the entrepreneurial talent.Introduction of informed capital (eg venture capital finance) with superior screening ability results in an institutional equilibrium with efficiency gains in human-capital industries.Contrary to received wisdom, the institutional equilibrium with informed capital is characterised by more limited entry to an industry, which requires highly talented human capital. Unexpectedly, the total welfare effect is ambiguous, as the allocation of non-informed capital is now less efficient in the conventional industry.The institutional equilibrium is shaped by investors' risk preferences, costs of establishing uninformed and informed capital, and the initial distribution ot talent in the economy. Key words: allocation of talent, asymmetric information, financial institutions, venture capital, institutional equilibrium JEL classification numbers: D82, G2, G24
  • Solttila, Heikki; Vihriälä, Vesa (1994)
    Suomen Pankin keskustelualoitteita 23/1994
    The paper focuses on the proximate causes of the Finnish savings and cooperative banks' non-performing assets in the current banking crisis.Specifically, the effects of the lending structure at the outset of the crisis and the rate of growth of lending in the latter half of the 1980s are investigated.The main findings are: (1) Lending structure alone is not sufficient to explain the variation in the share of non-performing assets among the local banks.(2) Growth of lending is a major explanatory factor: the faster the growth in the second half of the 1980s, the higher the later share of non-performing assets.(3) Growth of lending is a particularly important "cause" in the case of the savings banks, where lending structure does not seem to have had much of an impact.(4) Lending to manufacturing, construction and trade has had a significant negative effect on the cooperative banks' asset quality.(5) Differences in the rate of lending growth go a long way in explaining why there are on average much more problem loans in the savings bank group than in the cooperative bank group.(6) The share of foreign currency loans is not an important factor when the effect of growth is accounted for, although the roles cannot be fully separated due to multicollinearity.(7) Assuming that growth of lending is more under the control of a bank than the structure of lending, the findings support the view that "bad luck" is not the only explanation of the Finnish banking problems but "bad banking" in the form of either ignorance of risks or deliberate risk taking is a major factor as well.
  • Välimäki, Tuomas (2001)
    Bank of Finland. Discussion papers 8/2001
    This paper presents a general equilibrium model of the determination of equilibrium in the interbank market for overnight liquidity when the central bank uses fixed rate tenders in its liquidity provision.We consider three alternative liquidity policy rules.First, the central bank may provide the bid amounts in full. Alternatively, the central bank can scale back the bid amounts pro rata with the individual bids.For the latter case, we consider two target options for the central bank: liquidity or an interest rate. We show that the expected overnight rate remains more tightly in the hands of the central bank if the full allotment procedure or a pure interest rate targeting rule is used than if liquidity targeting is used.We will also demonstrate how optimal bidding in tender operations varies considerably according to which procedure is chosen by the central bank.
  • Junttila, Juha (2002)
    Bank of Finland. Discussion papers 2/2002
    Using recently developed modelling methodology of Economic Tracking Portfolios (ETP), we find that it is possible to forecast future values of inflation and changes in industrial production in the United States and at least three core euro countries - Italy, France and Germany - utilising only current and past financial market information.The longer the forecasting horizon, the better the forecasts based solely on financial market information compared to results from other methods.Of the analysed countries, the overall forecasting performance of the tracking portfolios is the best for the United States, and the method employed here clearly outperforms the forecasting performance of a more traditional VAR approach. Key words: financial markets, forecasting, macroeconomy, euro area, USA
  • Kuo, Biing-Shen; Mikkola, Anne (2000)
    Bank of Finland. Discussion papers 13/2000
    The out-of-sample forecasting performances of two univariate time series presentations for the USD/DEM real exchange rate are compared using quarterly data for the period 1957Q1-1998Q4.The linear AR process is frequently fitted to real exchange rate series because it is sufficient for capturing the reported slow mean reversion in real exchange rates and it has some predictive ability for the long run.A simple nonlinear alternative, the threshold autoregressive (TAR) model, allows for the possibility that there is a band of slow or no convergence around the purchasing power parity level in the real exchange rate, due to transportation costs or other market frictions that create barriers to arbitrage.The TAR model is theoretically and empirically appealing, and it has been fitted to real exchange rates in many recent papers.However, the ultimate test of its usefulness is its out-of-sample forecasting accuracy.We compare the TAR model to its simple linear AR alternative in terms of out-of-sample forecast accuracy. Preliminary results using the RMSE criterion indicate that TAR forecasts are more sensitive to the estimation period and that they involve considerably more uncertainty at long horizons, as compared with the simple AR model.
  • Bech, Morten L.; Soramäki, Kimmo (2001)
    Suomen Pankin keskustelualoitteita 9/2001
    The paper analyses the severity of gridlocks in interbank payment systems operating on a real time basis and evaluates by means of simulations the merits of a gridlock resolution algorithm.Data used in the simulations consist of actual payments settled in the Danish and Finnish RTGS systems.The algorithm is found to be applicable to a real time environment and effective in reducing queuing in the systems at all levels of liquidity, but in particular when intra-day liquidity is scarce
  • Haavio, Markus; Kauppi, Heikki (2000)
    Bank of Finland. Discussion papers 8/2000
    Recent European data indicate that countries where a large proportion of the population lives in owner-occupied housing are experiencing higher unemployment rates than countries where the majority of people live in private rental housing, which might suggest that rental housing enhances labor mobility.In this paper, we develop a simple intertemporal two-region model that allows us to compare owner-occupied housing markets to rental markets and to analyze how these alternative arrangements allocate people in space and time.Consistent with the empirical observations, we find that the interregional labor market is more fluid under rental housing than under owner-occupation.As a result of greater mobility, the rental arrangement also results in better allocational efficiency than owner-occupation.When dwellings are rented, the decision to move to a booming region is largely based on current productivity, whereas under owner-occupation random wealth effects encourage deviations from this optimal behavior.
  • Brunila, Anne; Hukkinen, Juhana; Tujula, Mika (1999)
    Bank of Finland. Discussion papers 1/1999
    Cyclically adjusted government budget balances have become increasingly popular as a means of analysing the fiscal situation and changes in policy that result from the intentional actions of the government.As the actual budget balances are affected both by cyclical factors ('automatic stabilisers') and structural ('discretionary') measures, they may not, in general, be very useful when seeking to assess the orientation of underlying fiscal policy and possible structural imbalances in the budget balance. The problem however is that there is no generally accepted method of calculating cyclically adjusted (structural) budget balances. The results tend to be fairly noisy and sensitive to the method of calculation.The purpose of this article is to highlight these issues by reviewing three estimation methods used by the Bank of Finland - GDP smoothing based on the Hodrick-Prescott trend estimation method, the production function approach and Blanchard's method - and the corresponding estimates of the cyclically adjusted budget balances for Finland. Keywords: fiscal policy, cyclically adjusted budget balance
  • Hietala, Pekka; Jokivuolle, Esa; Koskinen, Yrjö (2000)
    Suomen Pankin keskustelualoitteita 4/2000
    The purpose of this paper is to provide an explanation for relative pricing of futures contracts with respect to underlying stocks using a model incorporating short sales constraints and informational lags between the two markets.In this model stocks and futures are perfect substitutes, except for the fact that short sales are only allowed in futures markets.The futures price is more informative than the stock price, because the existence of short sales constraints in the stock market prohibits trading in some states of the world.If an informed trader with no initial endowment in stocks receives negative information about the common future value of stocks and futures, he is only able to sell futures.Uninformed traders also face a similar short sales constraint in the stock market.As a result of the short sales constraint, the stock price is less informative than the futures price even if the informed trader has received positive information.Stocks can be under- and overpriced in comparison with futures, provided that market makers in stocks and futures only observe the order flow in the other market with a lag.Our theory implies that: 1) the basis is positively associated with the contemporaneous futures returns; 2) the basis is negatively associated with the contemporaneous stock return; 3) futures returns lead stock returns; 4) stock returns also lead futures returns, but to a lesser extent; and 5) the trading volume in the stock market is positively associated with the contemporaneous stock return.The model is tested using daily data from the Finnish index futures markets.Finland provides a good environment for testing our theory, since short sales were not allowed during the period for which we have data (27 May 1988 - 31 May 1994).We find strong empirical support for the implications of our theory.
  • Leinonen, Harry (1998)
    Suomen Pankin keskustelualoitteita 16/1998
    Over the next few years, we will see a pronounced increase in the speed at which payment transactions are executed and in the share of cross-border transactions, particularly in the euro area. Counterparty risks and liquidity needs connected with the transfer of funds continue to evolve and to provoke discussion.The fact that funds transfers occur and systems operate on a real-time and gross basis will significantly alter the operational character and technical solutions in this field.Systems following a daily timetable are being replaced by continuously operating systems, which will have a significant impact on banks' liquidity management.The trend toward immediate real-time payment transactions seems inevitable in the light of present trends. It is generally presumed that RTGS systems operating on a gross basis require more liquidity than netting systems.Liquidity needs depend on payment system structures and payment flows.An even flow of payments requires less liquidity than an uneven flow.Liquidity needs can be significantly reduced by choosing an appropriate pa yment system structure, taking measures to even out payment flows and agreeing on market practices.The pricing, collateral and reserve requirement policies of the central bank affect also the efficiency of alternative payment systems.Thus the overall efficiency of a gross or net system depends on many factors. Factors arguing for a gross system are differences in counterparty risks, lack of reciprocity, steady interday payment flows and stable liquidity needs, both within and between days.Factors favouring net systems are the existence of small and varying counterparty risks and structurally unsteady payment flows that result in large interday variations in liquidity, even though overnight variations may be moderate. Current, daily-oriented practices have focused on overnight liquidity needs.In a continuously operating enviroment, liquidity needs are continuously monitored across time-period borders.This means that banks' liquidity management will in the future operate under a new and broader time perspective. Significant liquidity needs and large counterparty risks are inherent parts of Finland's present funds-transfer solutions. Liquidity can be freed for other uses and counterparty risks reduced by changing the structures.The necessary changes have been agreed and soon we will see fundamental changes in Finnish payment systems. Key word: payment system settlement, gross settlement, RTGS, payment system counterparty risks, payment system liquidity needs
  • Kauko, Karlo (2003)
    Bank of Finland. Discussion papers 26/2003
    Published in Journal of Banking & Finance, Volume 31, Issue 10, October 2007, pp. 2962-2977
    Central securities depositories (CSDs) have opened mutual links, but most of them are seldom used.Why are idle links established? By allowing a foreign CSD to offer services through the link the domestic CSD invites competition.The domestic CSD can determine the cost efficiency of the rival by charging suitable fees, and prevent it from becoming more competitive than the domestic CSD.By inviting the competitor the domestic CSD can commit itself not to charge monopoly fees for secondary market services.This enables the domestic CSD to charge high fees in the primary market without violating investors participation constraints. Key words: securities settlement systems, central securities depositories, network industries, access pricing JEL classification numbers: G29, L13
  • Alberola, Enrique; Tyrväinen, Timo (1998)
    Bank of Finland. Discussion papers 15/1998
    The Balassa-Samuelson (BS) model is evaluated in eight of the eleven EMU countries.This model suggests that productivity differentials between traded and non-traded goods sectors generate sectoral inflation differentials (dual inflation).Furthermore, differentials in the degree of dual inflation induce inflation differentials between countries. The standard BS model implies a cointegration relationship between relative prices and sectoral productivities.While this link generally seems to exist, the magnitudes of the parameter estimates are not in accordance with the theoretical model in most countries. As the presumed uniformity of sectoral wages is rejected in most cases, relative wages were allowed to enter the estimation.This extended BS model is endorsed by the data in every country. Simulations based on these results were carried out to quantify possible inflation differentials.Setting EMU-wide inflation equal to 2% and assuming that PPP holds for traded goods, the projected inflation varies around the EMU-average within a margin of some b1 1 percentage points accross the countries. Keywords: sectoral productivity, inflation differentials, EMU
  • Kuismanen, Mika (2000)
    Bank of Finland. Discussion papers 5/2000
    It is well known that estimation of the labour supply function is complicated by the non-linearity of the individual s budget constraint.Non-linearity may be caused by a number of factors such as the structure of the tax/benefit scheme or overtime rates. Non-linearities also cause problems in interpreting the policy implications of the estimates.In this study we use a well-structured econometric labour supply model that mimics actual budget constraints as closely as possible to analyse the labour-supply effects of different income tax regimes and systems. In addition to the empirically-specified labour supply model, we construct, for the first time in Finland, a behavioural microsimulation model.Our intent is to contribute to the tax debate in Finland by simulating several suggested changes in the tax system.Our simulation results show that none of the proposed reforms are self-financing.Revenue-neutral move to a proportional tax system does not have major effects on labour supply.The most pronounced behavioural effects are achieved when marginal tax rates are reduced at the lower end of the income tax schedule. Keywords: microsimulation, labour supply, taxation
  • Koskela, Erkki (2001)
    Bank of Finland. Discussion papers 19/2001
    This paper uses a union bargaining framework, where the wage rate is negotiated between the representatives of employees and employers and firms unilaterally determine employment, to discuss the relationship between labour taxation and employment.In imperfectly competitive labour markets higher labour taxes income and payroll taxes will increase labour costs and have negative effects on employment.Tax progression tends to moderate wages and boost employment.Moreover, if labour tax bases are unequal due to tax exemptions, the structure of labour taxation matters so that the tax wedge may not be a sufficient statistic to describe the channel of influence of labour taxation.Finally, distortionary effects of labour taxes in more corporatist economies should be smaller than in economies with more decentralised wage bargaining. Empirical evidence though not always very strong supports these notions. Keywords: union bargaining, labour taxation, tax progression