Browsing by Author "Bask, Mikael"

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  • Bask, Mikael (2007)
    Bank of Finland Research Discussion Papers 25/2007
    Published in International Journal of Finance and Economics, Volume 19, Issue 2, March 2014, Pages 140-159
    The aim of this paper is to determine whether it would be desirable from the perspective of macroeconomic balance for central banks to take account of nominal exchange rate movements when framing monetary policy. The theoretical framework is a small, open DSGE economy that is closed by a Taylor rule for the monetary authority, and a determinate REE that is least-squares learnable is defined as a desirable outcome in the economy. When the policy rule contains contemporaneous data on the output gap and the CPI inflation rate, the monetary authority does not have to consider the exchange rate as long as there is sufficient inertia in policy-making. In fact, due to a parity condition on the international asset market, interest-rate smoothing and a response to changes in the nominal exchange rate are perfectly intersubstitutable in monetary policy. In other words, we give a rationale for the monetary authority to focus on the change in the nominal interest rate rather than its level in policy-making. Thus, we have a case for interest-rate smoothing. Keywords: determinacy, E-stability, foreign exchange, inertia, Taylor rule JEL classification numbers: E52, F31
  • Bask, Mikael (2006)
    Bank of Finland Research Discussion Papers 7/2006
    Published in European Financial Management, 14, No. 1, 2008, Pages 99-117
    It is demonstrated in this paper that adaptive learning in least squares sense may be incapable to reduce, in a satisfactory way, the number of attainable equilibria in a rational expectations model.The model investigated, as an illustration, is the monetary approach to exchange rate determination that is augmented with technical trading in the currency market in the form of moving averages since it is the most commonly used technique according to questionnaire surveys.Because of technical trading in foreign exchange, the current exchange rate is dependent on jmax lags of the exchange rate, and the model has, therefore jmax + 1 nonbubble rational expectations equilibria (REE), where most of them are adaptively learnable.However, by assuming that a solution to the model should have a solution to a nested model as its limit, it is possible to single out a unique equilibrium among the adaptively learnable equilibria that is economically meaningful.Key words: asset pricing, heterogenous agents, least squares learnability, rational expectations equilibria and technical trading JEL classification numbers: C62, F31, G12
  • Bask, Mikael (2006)
    Bank of Finland Research Discussion Papers 6/2006
    Published in International Journal of Finance and Economics, Volume 14, Issue 1, January 2009: 64-84
    The aim of this paper is to analyse the announcement effects on exchange rate movements using the basic asset pricing model, where currency trade is partly determined by technical trading in the form of moving averages since it is the most commonly used technique according to questionnaire surveys.Specifically, the announcement and implementation of temporary as well as permanent monetary policy are analysed, where the exchange rate model developed is summarised in a linear difference equation in current exogenous fundamentals, a large number of lags of the endogenous exchange rate and time-t dating of exchange rate expectations. However, since there are a large number of rational expectations equilibria, continuity is proposed as a selection criterion among the equilibria, meaning that the parameter for the time-t - 1 exchange rate should have the limit 0 when there is no technical trading to have an economically meaningful equilibrium.It turns out that there is a unique rational expectations equilibrium that satisfy the continuity criterion, and focusing on this equilibrium, it is shown that the exchange rate is much more sensitive to changes in money supply than when technical trading is absent in currency trade.This result is important since it sheds light on the so-called exchange rate disconnect puzzle in international finance.Key words: asset pricing, exchange rate disconnect puzzle, heterogeneous agents, least squares learnability, monetary policy and technical trading. JEL classification numbers: E51, E52, F31, G12
  • Bask, Mikael (2006)
    Bank of Finland Research Discussion Papers 8/2006
    Published in Frontiers in Finance and Economics (forthcoming)
    Since the magnitude of exchange rate overshooting may not be the same for different exchange rates of a currency, a monetary expansion or contraction in, for example, the EMU, will affect the exchange rate between the U.S. dollar and the yen, even though there are no changes in monetary fundamentals in the U.S. or Japan. This fact is demonstrated in a sticky-price monetary model due originally to Dornbusch (1976) that is enlarged with currency traders that use Chartism in the form of moving averages.It is also demonstrated that purchasing power parity (PPP) does not necessarily hold in long-run equilibrium.These results are interesting since, according to the empirical literature, there are often large movements in nominal exchange rates that are apparently unexplained by macroeconomic fundamentals, and there is also a weak support for PPP.Key words: Chartism, foreign exchange, macroeconomic fundamentals, moving averages, overshooting and PPP JEL classification numbers: F31, F41
  • Bask, Mikael; Fidrmuc, Jarko (2006)
    Bank of Finland Research Discussion Papers 10/2006
    Published in Open Economies Review, Volume 20, Issue 5, November 2009, Pages 589-605
    We present a model of exchange rates, which incorporates the monetary approach and technical trading, and we present the reduced form based on the minimal state variable solution, where both fundamentals and backward-looking term determine the spot exchange rates.Finally, we estimate the impact of the monetary fundamentals for a panel of Central and Eastern European countries (Czech Republic, Poland, Romania and Slovakia) in the second half of the 1990s as well as the complete model of exchange rate determination for daily data over the more recent free-floating period.Key words: foreign exchange market, fundamental analysis, panel cointegration, technical analysis JEL classification numbers: C23, F31, F36
  • Bask, Mikael (2007)
    Bank of Finland Research Discussion Papers 22/2007
    Published in Journal of Economics and Business, Volume 61, Issue 2, March-April 2009: 97-111
    We embed different instrument rules into a New Keynesian model for a small open economy that is augmented with technical trading in currency trade to examine the prerequisites for monetary policy. Specifically, this paper focuses on conditions for a determinate, least-squares learnable rational expectations equilibrium (REE). Under an interest rate rule with only contemporaneous macroeconomic data, the intensity of technical trading or trend-seeking in currency trade does not affect these conditions, except in the case of an extensive use of trend-seeking. On the other hand, if the central bank uses only forward-looking information in its interest rate rule, a determinate and learnable REE is a less likely outcome when trend-seeking in currency trade becomes more popular. The interest rate rule followed by the central bank in the model incorporates interest rate smoothing. Keywords: determinacy, DSGE model, interest rate rule, least-squares learning, technical trading JEL classification numbers: C62, E52, F31, F41
  • Bask, Mikael (2007)
    Bank of Finland Research Discussion Papers 19/2007
    A DSGE model with a Taylor rule is augmented with an evolutionary switching between technical and fundamental analyses in currency trade, where the fractions of these trading tools are determined within the model. Then, a shock hits the economy. As a result, chaotic dynamics and long swings may occur in the exchange rate, which are appealing features of the model given existing empirical evidence on chaos and long swings in exchange rate fluctuations. Keywords: chaotic dynamics, foreign exchange, fundamental analysis, monetary policy, technical analysis JEL classification numbers: C65, E32, E44, E52, F31
  • Bask, Mikael (2007)
    Bank of Finland Research Discussion Papers 20/2007
    Published in Journal of Financial Stability, Volume 6, Issue 3, September 2010: 180-186
    The difference between market risk and potential market risk is emphasized and a measure of the latter risk is proposed. Specifically, it is argued that the spectrum of smooth Lyapunov exponents can be utilized in what we call (??2)-analysis, which is a method to monitor the aforementioned risk measures. The reason is that these exponents focus on the stability properties (?) of the stochastic dynamic system generating asset returns, while more traditional risk measures such as value-at-risk are concerned with the distribution of returns (?2). Keywords: market risk, potential market risk, smooth Lyapunov exponents, stochastic dynamic system, value-at-risk JEL classification number: G11
  • Bask, Mikael (2007)
    Suomen Pankin keskustelualoitteita 24/2007
    This study shows that an expectations-based optimal policy rule has desirable properties in a standard macroeconomic model incorporating a cost channel for monetary disturbances and inflation rate expectations that are partly backward-looking. Specifically, optimal monetary policy under commitment is associated with a determinate REE that is stable under learning, whereas, under discretion, the central bank has to be sufficiently inflation averse for the equilibrium to have these properties. Keywords: commitment, determinacy, discretion, expectations-based rule, least squares learning JEL classification numbers: E52, E61
  • Bask, Mikael (2007)
    Bank of Finland Research Discussion Papers 21/2007
    We embed an expectations-based optimal policy rule into a DSGE model for a small open economy that is augmented with trend extrapolation or chartism, which is a form of technical trading, in currency trade to examine the prerequisites for monetary policy. We find that a unique REE that is least-squares learnable is often the outcome when there is a limited amount of trend extrapolation, but that a less flexible inflation rate targeting may cause a multiplicity of REE. We also compute impulse-response functions for key macroeconomic variables to study how the economy returns to steady state after being hit by a shock. Keywords: determinacy, DSGE model, least-squares learning, targeting rule, technical trading, monetary policy JEL classification numbers: C62, E52, F31, F41
  • Bask, Mikael; Selander, Carina (2007)
    Bank of Finland Research Discussion Papers 6/2007
    Published in International Economics and Economic Policy, Volume 6, Number 3, October 2009: 283-313
    The aim of this paper is threefold: (i) to investigate if there is a unique rational expectations equilibrium (REE) in the small open economy in Gall and Monacelli (2005) that is augmented with technical trading in the foreign exchange market; (ii) to investigate if the unique REE is adaptively learnable in a recursive least squares sense; and (iii) to investigate if the unique and adaptively learnable REE is desirable in an inflation rate targeting regime in the sense that a low and not too variable CPI inflation rate in equilibrium is achieved. The monetary authority is using a Taylor rule when setting the nominal interest rate, and we investigate numerically the properties of the model developed. A main conclusion is that the monetary authority should increase (decrease) the interest rate when the CPI inflation rate increases (decreases) and when the currency gets stronger (weaker) to have a desirable rule that is robust with respect to the degree of technical trading in the foreign exchange market. Thus, the value of the currency is a better response variable than the output gap in the most desirable parametrizations of the interest rate rule. JEL classification numbers: E52, F31 Key words: determinacy, foreign exchange, inflation rate targeting regime, interest rate rule, robust monetary policy, technical trading
  • Bask, Mikael; Liu, Tung; Widerberg, Anna (2006)
    Bank of Finland Research Discussion Papers 9/2006
    Published in Physica A, 376, 2007: 565-572
    The aim of this paper is to illustrate how the stability of a stochastic dynamic system is measured using the Lyapunov exponents. Specifically, we use a feedforward neural network to estimate these exponents as well as asymptotic results for this estimator to test for unstable (chaotic) dynamics.The data set used is spot electricity prices from the Nordic power exchange market.Nord Pool, and the dynamic system that generates these prices appears to be chaotic in one case.Key words: feedforward neural network, Nord Pool, Lyapunov exponents, spot electricity prices, stochastic dynamic system JEL classification numbers: C12, C14, C22