Browsing by Subject "E61"

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  • Kortelainen, Mika (2007)
    Bank of Finland Research Discussion Papers 9/2007
    We present a two country DGE model and estimate it using Bayesian techniques and euro area and US quarterly data for 1977 2004. In analysing the current accounts we find that a lower US rate of time preference or a higher dollar risk premium could render the deficit sustainable, but that these could push the interest rate to the zero bound. Secondly, we find that fiscal policy is not sufficiently effective to improve the current account although the zero bound is not hit. Key words: current account, zero bound, policy coordination JEL classification numbers: E61, F32
  • Crowley, Patrick M.; Hudgins, David (2016)
    Bank of Finland Research Discussion Papers 21/2016
    This paper uses wavelet-based optimal control to simulate fiscal and monetary strategies under different levels of policy restrictions. The model applies the Maximal Overlap Discrete Wavelet Transform (MODWT) to United States quarterly GDP data, and then uses the decomposed variables to build a large 80 dimensional state-space linear-quadratic tracking model. Using a political targeting design for the frequency range weights, we simulate jointly optimal fiscal and monetary policy where: (1) both fiscal and monetary policy are dually emphasized, (2) fiscal policy is unrestricted while monetary policy is restricted to achieving a steady increase in the market interest rate, and (3) only monetary policy is relatively active, while fiscal spending is restricted to achieving a target growth rate. The results show that fiscal policy must be more aggressive when the monetary authorities are not accommodating the fiscal expansion, and that the dual-emphasis policy leads a series of interest rate increases that are balanced between a steadily increasing target and a low, fixed rate. This research is the first to construct integrated fiscal and monetary policies in an applied wavelet-based optimal control setting using U.S. data.
  • Mayes, David; Virén, Matti (2004)
    Suomen Pankin keskustelualoitteita 9/2004
    Using quarterly data for the period since 1987 this paper explores, in the context of a small model of the EU economy, the degree to which monetary policy has been asymmetric.It shows in particular that monetary policy has been much more responsive to threats that inflation would lie outside the price stability target than to equal sized shocks within the target zone. Similarly monetary policy has responded to threats of large positive and negative output gaps but has remained largely unresponsive to smaller divergences.It thus appears that the ECB and its predecessors have been avoiding 'fine-tuning' but have been aggressive in responding to substantial threats to macroeconomic stability.The action seems to have been stronger with respect to inflationary pressure than to deflation but this may offset any bias in fiscal policy.The asymmetric response of policy in part reflects considerable non-linearities and asymmetries in the behaviour of the euro area economies.High unemployment has relatively limited effect in pulling inflation down while low unemployment can be much more effective in driving it up.Economic downturns are both more rapid and sustained in driving unemployment up than recoveries are in bringing it down. There is considerable variety in these relationships and IS curves across countries, sectors and regions.Monetary policy reacts in the light of this. Key words: monetary policy, asymmetry JEL classification numbers: E52, E61
  • Halko, Marja-Liisa (2003)
    Bank of Finland. Discussion papers 24/2003
    In this paper we study the implications of the unemployment insurance (UI) financing system on wage levels and employment when labour markets are unionised and the revenues of the firms are stochastic.We use the basic monopoly union approach of wage and employment determination and assume that unemployment benefits are financed by employees UI contributions to the union s UI fund and by the government s tax revenue.The main focus of this paper is on the effects of UI buffer funding on employment fluctuations.We show that, compared with the pay-as-you-go financing system, buffer funding stabilises the economy by decreasing employment fluctuations where wages are flexible.If wages are rigid, buffer funding stabilises net wage variations, but has hardly any effect on employment fluctuations. Key words: unemployment insurance, unions, stabilisation, buffer funding JEL classification numbers: E61, J51, J65
  • 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.
  • Fromlet, Hubert (2014)
    BOFIT Policy Brief 15/2014
    During and after the Central Committee’s Third Plenum in November 2013, China announced far-reaching reforms in the spheres of marketization and economic deregulation that included financial markets. While the speed of the rollout of China’s planned reforms is still unknown, officials repeatedly reference the great opportunities for guiding China onto a healthier, more sustainable social and economic track. The risks of such ambitious marketization and deregulation plans need to be considered in the context of speed and sequencing of reforms of the financial sector. We currently lack the skills for overcoming the famously low predictability of financial crises. The areas for skill improvement largely relate to market psychology (behavioral finance) and the understanding of history and macrofinancial aggregates. The much-undervalued discipline of behavioral finance has started to come into its own over the past 10 to 15 years, including the awarding of the 2013 Nobel Prize Robert in Economics to Robert Shiller for his efforts at understanding the psychology of financial markets. This year’s Nobel Prize winner, Jean Tirole, also considers behavioral aspects in his work. Sweden has had two serious banking crises in the past 30 years. The first – and most serious – crisis occurred in the early 1990s, while a smaller crisis took place at the end of the last decade. Both were foreseeable. The first crisis emerged as Swedish banking entered uncharted deregulation waters, a situation Chinese reformers will themselves inevitably confront. Swedish research findings with respect to sequencing, speed of reforms and behavioral finance apply nicely to the Chinese discussion. The italicized discussion focuses on what the Swedish deregulation experience means for Chinese policy choices, but most of these observations are generally relevant for policymakers in emerging markets in Asia and elsewhere. Publication keywords: financial deregulation, Asia, Sweden
  • Kilponen, Juha; Leitemo, Kai (2007)
    Suomen Pankin keskustelualoitteita 8/2007
    Published in Journal of Economic Dynamics and Control, Volume 35, Issue 4, April 2011: 565-578
    Monetary policy transmission lags create credibility problems for the inflationtargeting policy maker who acts under discretion. We show that if prices react to monetary policy with a longer lag than output, the welfare maximizing inflationtargeting policy implies no policy stabilization of cost-push shocks in the canonical New Keynesian model. The reason is simple: for the period monetary policy influences output, inflation is predetermined and the best discretionary policy is to stabilize the output gap fully. We find that money growth targeting comes close to replicating the welfare-maximizing policy under commitment if there are transmission lags. Keywords: discretionary and stabilization bias, monetary policy, transmission lags, inflation targeting, money targeting JEL classification numbers: E52, E58, E61
  • Kim, Soyoung; Mehrotra, Aaron (2017)
    BOFIT Discussion Papers 4/2017
    We examine the effects of monetary and macroprudential policies in the Asia-Pacific region, where many inflation targeting economies have adopted macroprudential policies in order to safeguard financial stability. Using structural panel vector autoregressions that identify both monetary and macro-prudential policy actions, we show that tighter macroprudential policies used to contain credit growth have also had a significant negative impact on macroeconomic aggregates such as real GDP and the price level. The similar effects of monetary and macroprudential policies may suggest a complementary use of the two policies at normal times. However, they could also create challenges for policy-makers, especially during times when low inflation coincides with buoyant credit growth.
  • Castelnuovo, Efrem; Greco, Luciano; Raggi, Davide (2008)
    Bank of Finland Research Discussion Papers 20/2008
    This paper estimates regime-switching monetary policy rules featuring trend inflation using post-WWII US data. We find evidence in favour of regime shifts and time-variation of the inflation target. We also find a drop in the inflation gap persistence when entering the Great Moderation sample. Estimated Taylor rule parameters and regimes are robust across different monetary policy models. We propose an `internal consistency' test to discriminate among our estimated rules. Such a test relies upon a feedback mechanism running from the monetary policy stance to the inflation gap. Our results support the stochastic autoregressive process as the most consistent model for trend inflation, above all when conditioning to the post-1985 subsample. Keywords: active and passive Taylor rules, trend inflation, inflation gap persistence, Markov-switching models JEL classification numbers: E52, E61, E62
  • Crowley, Patrick M.; Hudgins, David (2015)
    Bank of Finland Research Discussion Papers 12/2015
    This paper first applies the MODWT (Maximal Overlap Discrete Wavelet Transform) to Euro Area quarterly GDP data from 1995 – 2014 to obtain the underlying cyclical structure of the GDP components. We then design optimal fiscal and monetary policy within a large state-space LQ-tracking wavelet decomposition model. Our study builds a MATLAB program that simulates optimal policy thrusts at each frequency range where: (1) both fiscal and monetary policy are emphasized, (2) only fiscal policy is relatively active, and (3) when only monetary policy is relatively active. The results show that the monetary authorities should utilize a strategy that influences the short-term market interest rate to undulate based on the cyclical wavelet decomposition in order to compute the optimal timing and levels for the aggregate interest rate adjustments. We also find that modest emphasis on active interest rate movements can alleviate much of the volatility in optimal government spending, while rendering similarly favorable levels of aggregate consumption and investment. This research is the first to construct joint fiscal and monetary policies in an applied optimal control model based on the short and long cyclical lag structures obtained from wavelet analysis.
  • Crowley, Patrick M.; Hudgins, David (2014)
    Bank of Finland Research Discussion Papers 32/2014
    Published in Economic Modelling. Volume 51, December 2015, Pages 502–514
    In this paper discrete wavelet filtering techniques are applied to decompose macroeconomic data so that they can be simultaneously analyzed in both the time and frequency domains. The MODWT (Maximal Overlap Discrete Wavelet Transform) is applied to U.S. quarterly GDP data from 1947–2012 to obtain the underlying cyclical structure of the GDP components. A MATLAB program is then used to design optimal fiscal policy within a LQ-tracking model with wavelet decomposition, and the results are compared with an aggregate model with no frequency decomposition. The results show that fiscal policy is more active under the wavelet-based model, and that the consumption and investment trajectories under the aggregate model are misaligned. We also simulate FHEC (Frequency Harmonizing Emphasis Control) strategies that allow policymakers to concentrate the policy thrust on tracking frequencies that are optimally aligned with policy goals under different targeting priorities. These strategies are only available by using time-frequency analysis. This research is the first to construct fiscal policy in an applied optimal control model on the short and cyclical lag structures obtained from wavelet analysis. Our wavelet-based optimal control procedure allows the policymaker to construct a pragmatic tracking policy, avoid suboptimal policies gleaned from an aggregate model, and reduce the potential for destabilization that might otherwise result due to improper thrust and timing. Keywords: LQ tracking, macroeconomics, optimal control, discrete wavelet analysis, fiscal policy
  • Crowley, Patrick M.; Hudgins, David (2020)
    BoF Economics Review 1/2020
    When the central bank sets monetary policy according to a conventional or modified Taylor rule (which is known as the Taylor Principle), does this deliver the best outcome for the macroeconomy as a whole? This question is addressed by extending the wavelet-based control (WBC) model of Crowley and Hudgins (2015) to evaluate macroeconomic performance when the central bank sets interest rates based on a conventional or modified Taylor rule (TR). We compare the simulated performance of jointly optimal fiscal and monetary policy under an unrestricted baseline model with performance under the TR. We simulate the model under relatively small and large weighting of the output gap in the TR specification, and for both low and high inflation environments. The results show that the macroeconomic outcome depends on whether the conventional or modified Taylor rule is used, and whether the central bank is operating in a low or high inflation environment.
  • Bjørnland, Hilde C.; Leitemo, Kai (2005)
    Bank of Finland Research Discussion Papers 17/2005
    Published in Journal of Monetary Economics, Volume 56, Issue 2, March 2009, Pages 275-282
    We estimate the interdependence between US monetary policy and the S&P 500 using structural VAR methodology.A solution is proposed to the simultaneity problem of identifying monetary and stock price shocks by using a combination of short-run and long-run restrictions that maintains the qualitative properties of a monetary policy shock found in the established literature (CEE 1999).We find great interdependence between interest rate setting and stock prices.Stock prices immediately fall by 1.5 per cent due to a monetary policy shock that raises the federal funds rate by ten basis points.A stock price shock increasing stock prices by one per cent leads to an increase in the interest rate of five basis points.Stock price shocks are orthogonal to the information set in the VAR model and can be interpreted as non-fundamental shocks.We attribute a major part of the surge in stock prices at the end of the 1990s to these non-fundamental shocks. Key words: VAR, monetary policy, asset prices, identification JEL classification numbers: E61, E52, E43
  • Silvo, Aino (2018)
    Bank of Finland. Scientific monographs. E 52
    This thesis consists of an introductory chapter and three self-contained essays that apply insights from the microeconomic theory of corporate finance in a macroeconomic setting in order to explain and understand various market failures that were at the roots of the global financial crisis of 2007–2009. In particular, I study various forms of incomplete information in the credit market, and their implications on financial stability and on business cycles in the aggregate economy. I also seek to understand how monetary and macroprudential policies can be used to maintain financial stability, and how these two policies interact.
  • Rantala, Anssi (2003)
    Suomen Pankin keskustelualoitteita 11/2003
    Sufficiently flexible labour markets are considered an important precondition for countries to benefit from membership in the monetary union.Economic policy coordination within the European Community is extensive and includes issues related to labour market structures.In this paper we study the determination of flexibility of the labour market and, ultimately, of wages in a member country of the monetary union.As a starting point, the analysis assumes that each country's government, in formulating its labour market policy, decides the degree of nominal wage flexibility in light of the fact that this involves political costs that increase with the degree of wage flexibility.The study then focuses on the effects of monetary union membership on each country's prospects for coordination of economic policies - specifically labour market policies.The study shows that coordination of labour market policies contributes to greater nominal wage flexibility in member countries.However, coordination of labour market policies will be effective only if unemployment is persistent or under discretionary monetary policy.From the perspective of macroeconomic stability, there is no particular need for coordinating labour market policies among member countries if the common central bank can credibly precommit to a low inflation target or if fluctuations in unemployment are white noise.Key words: wage flexibility, economic policy coordination, credibility, precommitment JEL classification numbers: E52, E58, E61, J51
  • Hudgins, David; Crowley, Patrick M. (2017)
    Bank of Finland Research Discussion Papers 32/2017
    This paper develops a wavelet-based control system model that can be used to simulate fiscal and monetary strategies in an open economy context in the time-frequency domain. As the emphasis on real exchange rate stability is increased, the model simulates the effects on both the aggregate and decomposed trade balance under both constant and depreciating real exchange rate targets, and also the effects on the real GDP expenditure components. This paper adds to recent research in this area by incorporating an external sector via the use of a real effective exchange rate as a driver of output. The research is also the first to analyze exchange rate effects within a time-frequency model with integrated fiscal and monetary policies in an open-economy applied wavelet-based optimal control setting. To demonstrate the usefulness of this model, we use post-apartheid South African macro data under a political targeting design for the frequency range weights, where we simulate jointly optimal fiscal and monetary policy under varying preferences for real exchange rate stability.
  • Railavo, Jukka (2004)
    Suomen Pankin keskustelualoitteita 20/2004
    In this paper we analyse the monetary impact of alternative fiscal policy rules using the debt and deficit, both mentioned as measures of fiscal policy performance in the Stability and Growth Pact (SGP).We use a New Keynesian model, with endogenous labour supply, distortionary taxation and no private capital.The economy is hit by two fundamental shocks: demand and supply shocks, which are orthogonal to each other.Monetary policy is conducted by an independent central bank that will optimise.Under discretionary monetary policy the size of the inflation bias depends on the fiscal policy regime.Using the timeless perspetive approach to precommitment, output persistence increase compared to the discretionary case.The result holds with the alternative fiscal policy rules, and inflation and output persistence reflects the economic data.With the deficit rules, the autocorrelation of the tax rate is near unity irrespective of the monetary policy regime, and irrespective of the fiscal policy parameters and targets. Key words: inflation, optimal monetary policy, fiscal policy, policy coordination JEL classification numbers: E52, E31, E61, E62
  • Esanov, Akram; Merkl, Christian; Vinhas de Souza, Lúcio (2004)
    BOFIT Discussion Papers 11/2004
    Published in Journal of Comparative Economics vol 33, no 3 (2005), pp. 484-499
    The paper reviews the recent conduct of monetary policy and the central bank s rule-based behavior in Russia.Using different policy rules, we test whether the central bank in Russia reacts to changes in inflation, output gap and the exchange rate in a consistent and predictable manner.Our results indicate that during the period of 1993-2002 the Bank of Russia has used monetary aggregates as a main policy instrument in conducting monetary policy. JEL classification: E52, E61, F33, F41 Keywords: Monetary policy rules, exchange rate, central bank, Russia
  • Kortelainen, Mika (2017)
    BoF Economics Review 2/2017
    According to the Neo-Fisherian Hypothesis a nominal policy rate increase leads to an in-crease in the rate of inflation also in the short-run and the effects of Neo-Fisherian forward guidance on inflation and output are small. These results are obtained by assuming that the nominal interest rate is unresponsive to the output gap and inflation at least temporarily and that an arbitrary assumption that a backward stable perfect foresight solution is selected among a continuum of perfect foresight equilibria is valid. The result that nominal policy rates can move inflation in the same direction is at odds with monetary theory and practice.
  • 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