Browsing by Subject "E21"

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  • Funke, Michael; Paetz, Michael (2012)
    BOFIT Discussion Papers 11/2012
    In the wake of the 2008-2009 global financial crisis, the macroeconomic discussion has returned to the topic of proactive macroprudential policies. One proactive approach, the use of loan-to-value (LTV) policies to curb booming property markets, has long been used by Hong Kong's monetary authorities to actively manage and mitigate the potential fallout from housing price bubbles. Here, we analyse the merits of this countercyclical macroprudential policy in a New Keynesian DSGE model. We conclude that nonlinear LTV policy rules implemented in reaction to episodes of high property price inflation can limit transmission of housing price cycle effects to the real economy. Keywords: Macroprudential policy, DSGE model, loan-to-value ratio, Hong Kong. JEL classification: C63, E21, E32, E69, F41.
  • Knight, John; Wang, Wei (2011)
    BOFIT Discussion Papers 15/2011
    Published in The World Economy, Vol. 34, Issue 9, pp. 1476-1506, September 2011
    In recent years China has experienced two forms of extreme macroeconomic imbalance: an expenditure imbalance in the sense of very high investment and very low consumption, giving rise to rapid capital accumulation; and an imbalance between expenditure and pro-duction, producing external imbalance, i.e. a huge surplus on the current account of the balance of payments. Both imbalances imply a low rate of time discount by both govern-ment and society: consumption in the present is forgone in favour of consumption in the future. The paper examines how these imbalances came about, and goes on to consider whether they can be sustained and how they might be redressed. There is no evidence that the rapid capital accumulation has reduced the rate of profit on capital and thus the incen-tive to invest. However, persistent external imbalance poses a threat to investment if it ge-nerates excess liquidity and asset bubbles. The current account surplus rose remarkably in the years 2004-7. This was associated with exogenous increases in competiveness and in saving, both attributable to the economic reform policies. On current policies, the surplus is likely to rise again once the world economy recovers from its recession. This poses three sorts of problems, each of which is examined in turn: difficulties for macroeconomic stabi-lization policies; risk of capital loss on the foreign exchange holdings; and the threat of re-taliation by China's trading partners. A combination of internal and external policies will be required to redress the imbalance. Keywords: China; investment; consumption; current account; exchange rate; external im-balance; macroeconomic imbalance. JEL Classification: E21; E22; E61; F32; F41; F51.
  • Herrala, Risto (2010)
    Bank of Finland Research Discussion Papers 15/2010
    I find quantitative evidence of a significant effect for credit constraints on durable consumption during a post-deregulation consumer spending spree. The effect varied markedly across age and educational groups. Young households with low levels of education displayed high sensitivity to credit conditions. In contrast, older highly educated households were relatively immune to credit market developments. Keywords: durable consumption, credit constraints, stochastic frontier analysis JEL classification numbers: D12, D91, E21
  • Chowdhury, Abdur R. (2003)
    BOFIT Discussion Papers 3/2003
    Published in Comparative Economic Studies vol. 46 no. 4 (2004), pp. 487-514 as "Private Savings in Transition Economies: Are there Terms of Trade Shocks"
    This paper examines whether terms of trade shocks have an asymmetric effect on private savings in transition economies.A simple three-period framework is developed to show that, in the presence of binding credit constraints in bad states of nature, savings rates can be sensitive to favorable movements in the permanent component of the terms of trade.This result contrasts with the prediction of the conventional consumption-smoothing model.Empirical analysis with a dynamic panel model further confirms that while favorable movements in the permanent component of the terms of trade have an asymmetric effect on private savings, the magnitude of the effect is relatively small.The results are robust for alternative estimators, determinants, and country groupings.JEL classification: F10, E21, P33 Key words: transition, private savings, terms of trade
  • Wang, Haining; Cheng, Zhiming; Smyth, Russell (2015)
    BOFIT Discussion Papers 21/2015
    Published online in Journal of Development Studies
    This study examines the relationship between consumption and happiness, using panel data from China Family Panel Studies (CFPS). We find that total consumption expenditure has a significant and positive effect on happiness, but we find no evidence of a non-linear relationship between consumption and happiness. There are heterogeneous effects of consumption on happiness across subsamples and for different types of consumption expenditure. We find that relative consumption matters, irrespective if the reference group is de-fined in terms of consumption at the community or county level or on the basis of age, education and gender. However, the extent to which comparison effects are upward looking, or asymmetric, depend on how the comparison group is defined. We also find that comparison with one’s past consumption has no significant effect on an individual’s happiness.
  • D'Acunto, Francesco; Hoang, Daniel; Paloviita, Maritta; Weber, Michael (2020)
    Bank of Finland Research Discussion Papers 17/2020
    Communication targeting households and firms has become a stand-alone policy tool of many central banks. But which forms of communication, if any, can reach ordinary people and manage their economic expectations effectively? In a large-scale randomized control trial, we show that communication manages expectations when it focuses on policy targets and objectives rather than on the instruments designed to reach such objectives. It is especially the least sophisticated demographic groups, whom central banks typically struggle to reach, who react more to target-based communication. When exposed to target-based communication, these groups are also more likely to believe that policies will benefit households and the economy. Target-based communication enhances policy effectiveness and contributes to strengthen the public’s trust in central banks, which is crucial to ensure the effectiveness of their policies.
  • Sarlin, Peter; Ramsay, Bruce A. (2014)
    Bank of Finland Research Discussion Papers 11/2014
    This paper operationalizes early theoretical contributions of Hyman Minsky and applies these in the context of economic sectors and nations. Following the view of boom-bust asset cycles, depicted by the endogenous build-up of risks and their abrupt unraveling, Minsky highlighted the relationship between debt obligations and cash flows. While leverage is oftentimes linked to the vulnerability of a nation, and hence systemic risk, one less explored measure of leverage is the debt-to-cash flow ratio (Debt/CF). Cash flows certainly have a well-known, academically verified connection to the ability of corporations to service and repay corporate debt. This paper investigates whether the relationship between the flow of a nation's savings to its stock of total debt provides a means for understanding systemic risks. For a panel of 33 nations, we explore historic Debt/CF trends, as well as apply the same procedure to individual economic sectors. This assessment of systemic risk is arranged for presentation within a four-zone framework. In terms of an early-warning indicator, we show that the Debt/CF ratio e effectively stratifies systemic risks, and offers a useful platform toward macro-financial sustainability. Keywords: debt-to-cash flow, debt-to-gross saving, systemic risk, four-zone framework JEL codes: E210, F340, G010, H630
  • Puhakka, Mikko (2004)
    Suomen Pankin keskustelualoitteita 29/2004
    I explore the dynamics in overlapping generations models with pure exchange and lump-sum taxes, when the second period after tax endowment is negative, and contrast the characteristics of equilibria to those of models with positive after tax endowments. In particular, if the intertemporal elasticity of substitution is less than unity, there can be only a two cycle or stable (ie indeterminate) equilibria for certain parameter values.With this value for that elasticity chaos and a cycle of any order can occur in a model with regular endowments.In a sense the lump-sum taxation in this model operates as a stabilizing device.The precise stability condition holds with a small discount factor and in economies with relatively high taxes in the first period.If the intertemporal elasticity of substitution is greater than unity, the steady state equilibria are unstable, and thus determinate, as is the case with the regular model.Key words: overlapping generations economy, saving, cycles, lump-sum taxation JEL classification numbers: E21, E32
  • Kilponen, Juha; Vilmunen, Jouko; Vähämaa, Oskari (2013)
    Bank of Finland Research Discussion Papers 9/2013
    Cancellation of income and substitution effect implied by King-Plosser-Rebelo (1988) preferences breaks tight coefficient restriction between the slope of the Phillips curve and the elasticity of consumption with respect to real interest rate in a sticky price macro model. This facilitates the estimation of intertemporal elasticity of substitution using full information Bayesian Maximum Likelihood techniques within a structural model. The US data from the period 1984 - 2007 supports low intertemporal elasticity of substitution and strongly rejects a logarithmic and an additively separable utility specification commonly applied in the New Keynesian literature. Keywords: Monetary policy, Bayesian estimation, Non-separable utility. JEL: E32, E52, E21
  • Kilponen, Juha (2009)
    Bank of Finland Research Discussion Papers 9/2009
    Published in B.E. Journal of Macroeconomics, Volume 12, Issue 1, 2012, Article 10
    This paper derives and estimates an aggregate Euler consumption equation which allows one to compare the importance of collateral constraints and non-separability of consumption and leisure as alternative sources of excess sensitivity of consumption to current income. Estimation results suggest that during a severe financial distress both non-separability and collateral constraints are needed to capture excess sensitivity of consumption to current economic conditions. During more tranquil times, evidence on collateral effects is more limited and non-separability is sufficient to make the Euler consumption equation agree well with the data. Keywords housing, financial distress, excess sensitivity of consumption JEL classification numbers E21, E32, E44
  • Evans, George W.; Honkapohja, Seppo; Mitra, Kaushik (2016)
    Bank of Finland Research Discussion Papers 25/2016
    Stagnation as the new norm and fiscal policy are examined in a New Keynesian model with adaptive learning determining expectations. We impose inflation and consumption lower bounds, which can be relevant when agents are pessimistic. The inflation target is locally stable under learning. Pessimistic initial expectations may sink the economy into steady-state stagnation with deflation. The deflation rate can be near zero for discount factors near one or if credit frictions are present. Following a severe pessimistic expectations shock a large temporary fiscal stimulus is needed to avoid or emerge from stagnation. A modest stimulus is sufficient if implemented early.
  • Hasan, Iftekhar; Horvath, Roman; Mares, Jan (2020)
    Journal of International Money and Finance November
    Using a global sample, this paper investigates the determinants of wealth inequality capturing various economic, financial, political, institutional, and geographical indicators. Using instrumental variable Bayesian model averaging, it reveals that only a handful of indicators robustly matters and finance plays a key role. It reports that while financial depth increases wealth inequality, efficiency and access to finance reduce inequality. In addition, redistribution and education are associated with lower inequality whereas wars and openness to international trade contribute to greater wealth inequality.
  • Mitra, Kaushik; Evans, George W.; Honkapohja, Seppo (2012)
    Bank of Finland Research Discussion Papers 5/2012
    Published as Fiscal Policy Multipliers in an RBC Model with Learning, Macroeconomic Dynamics, 2019 ; 23 ; 1.
    Using the standard real business cycle model with lump-sum taxes, we analyze the impact of fiscal policy when agents form expectations using adaptive learning rather than rational expectations (RE). The output multipliers for government purchases are significantly higher under learning, and fall within empirical bounds reported in the literature (in sharp contrast to the implausibly low values under RE). Effectiveness of fiscal policy is demonstrated during times of economic stress like the recent Great Recession. Finally it is shown how learning can lead to dynamics empirically documented during episodes of "fiscal consolidations." JEL classification: E62, D84, E21, E43 Key words: Government Purchases, Expectations, Output Multiplier, Fiscal Consolidation, Taxation
  • Silvo, Aino (2017)
    Bank of Finland Research Discussion Papers 4/2017
    I study the link between house prices, lending standards, and aggregate over-investment in housing. I develop a model of the housing market where the credit market is affected by asymmetric information. Selection is towards less creditworthy borrowers. Asymmetric information coupled with deadweight costs of default can create endogenous boom-bust cycles in house prices. I show that lending standards are loose and the incentives for less-than-creditworthy borrowers to apply for a loan are particularly strong, first, when future house values are expected to be high, which leads to high leverage of borrowers; and second, when safe interest rates are low, which implies low costs of borrowing. However, there are strong nonlinearities in the relationship between borrowing incentives and economic fundamentals. The results shed light on incentive mechanisms that can help explain the developments in the U.S. housing market in the early 2000s. They also imply that loose monetary policy can have a direct impact on the stability of the housing market through the cost of borrowing and the opportunity cost of housing investment.
  • D'Acunto, Francesco; Hoang, Daniel; Paloviita, Maritta; Weber, Michael (2021)
    Bank of Finland Research Discussion Papers 12/2021
    Many consumers below the top of the distribution of a representative population by cognitive abilities barely react to monetary and fiscal policies that aim to stimulate consumption and borrowing, even when they are financially unconstrained and despite substantial debt capacity. Differences in income, formal education levels, economic expectations, and a large set of registry-based demographics do not explain these facts. Heterogeneous cognitive abilities thus act as human frictions in the transmission of economic policies that operate through the household sector and might imply redistribution from low- to high-cognitive ability agents. We conclude by discussing how our findings inform the microfoundation of behavioral macroeconomic theory.
  • D'Acunto, Francesco; Hoang, Daniel; Paloviita, Maritta; Weber, Michael (2019)
    Bank of Finland Research Discussion Papers 2/2019
    We use administrative and survey-based micro data to study the relationship between cognitive abilities (IQ), the formation of economic expectations, and the choices of a representative male population. Men above the median IQ (high-IQ men) display 50% lower forecast errors for inflation than other men. The inflation expectations and perceptions of high-IQ men, but not others, are positively correlated over time. High-IQ men are also less likely to round and to forecast implausible values. In terms of choice, only high-IQ men increase their propensity to consume when expecting higher inflation as the consumer Euler equation prescribes. High-IQ men are also forward-looking - they are more likely to save for retirement conditional on saving. Education levels, income, socio-economic status, and employment status, although important, do not explain the variation in expectations and choice by IQ. Our results have implications for heterogeneous-beliefs models of household consumption, saving, and investment.
  • Eerola, Essi; Määttänen, Niku (2015)
    Bank of Finland Research Discussion Papers 20/2015
    ​We study the interaction of matching and credit frictions in the housing market. In the model, risk-averse households may save or borrow in order to smooth consumption over time and finance owner housing. Prospective sellers and buyers meet randomly and bargain over the price. We analyze how borrowing constraints influence house price determination in the presence of matching frictions. We also show that credit frictions greatly magnify the effects of matching frictions. For instance, in the presence of matching frictions, a moderate tightening of the borrowing constraint increases idiosyncratic price dispersion and the average time-on-the-market substantially.
  • Eerola, Essi; Määttänen, Niku (2008)
    Bank of Finland Research Discussion Papers 8/2008
    We study how a household borrowing constraint the the form of a down payment requirement affects house price dynamics in an OLG model with standard preferences. We find that in certain situations the borrowing constraint shapes house price dynamics substantially. The importance of the constraint depends very much on whether house price changes are driven by interest rate or aggregate income shocks. Moreover, because of the borrowing constraint, house price dynamics display substantial asymmetries between large positive and large negative income shocks. These results are related to the fact that the share of borrowing-constrained households is different following different shocks. Keywords: house prices, dynamics, borrowing constraints, down payment constraint JEL classification numbers: E21, R21
  • Kaushik, Mitra; Evans, George W.; Honkapohja, Seppo (2011)
    Bank of Finland Research Discussion Papers 22/2011
    Published in Journal of Economic Dynamics and Control, Volume 37, Issue 10, October 2013, Pages 1947-1971
    What is the impact of surprise and anticipated policy changes when agents form expectations using adaptive learning rather than rational expectations? We examine this issue using the standard stochastic real business cycle model with lump-sum taxes. Agents combine knowledge about future policy with econometric forecasts of future wages and interest rates. Both permanent and temporary policy changes are analyzed. Dynamics under learning can have large impact effects and a gradual hump-shaped response, and tend to be prominently characterized by oscillations not present under rational expectations. These fluctuations reflect periods of excessive optimism or pessimism, followed by subsequent corrections. keywords: taxation, government spending, expectations, permanent and temporary policy changes, E62, D84, E21, E43
  • Fidrmuc, Jarko; Moroz, Serhiy; Reck, Fabian (2020)
    BOFIT Discussion Papers 25/2020
    Published in Empirica 48, 645-660 (2021)
    This paper analyzes the impact of ethnic heterogeneity and military conflict on the degree of regional consumption risk-sharing in Ukraine. Ethnicity and violent conflicts can influence risk-sharing e.g. through social capital, ethnic fractionalization, migration, and remittances. The sample consists of 25 Ukrainian oblasts and covers the highly volatile period from 2003 to 2016. Our results suggest that the degree of consumption risk-sharing is comparably high; between 70 and 80 percent on average. Moreover, consumption risk-sharing is significantly higher in the regions with a large Russian minority, which are enjoying special treatment by Russia. By contrast, the degree of financial development, as proxied by deposit and loan share in GRP, does not significantly affect the regional degree of consumption risk-sharing. Furthermore, we apply spatial models to control for spatial dependence across regions. Results are confirmed and it is shown that spatial correlation is important. Finally, we show that the recent geopolitical conflict in east Ukraine changed the regional degree of consumption risk-sharing.