Browsing by Author "Honkapohja, Seppo"

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  • Honkapohja, Seppo (2009)
    EURO & TALOUS 1
    Meneillään oleva rahoituskriisi on nyt kestänyt runsaan vuoden. Sodanjälkeisenä aikana nykyinen kriisi on kehittyneiden talouksien 19:s ja tämän vuosisadan ensimmäinen. Tuoreessa tutkimuksessaan Carmen Reinhard ja Kenneth Rogoff (2008) ovat jaotelleet tämänhetkistä Yhdysvaltain subprime-kriisiä edeltäneet 18 kriisiä viiteen suureen ja pienempiin kriiseihin. Viiteen suureen sisältyvät Norjan, Suomen ja Ruotsin 1990-luvun alkuun ajoittuneet kriisit. Norjan kriisi alkoi jo 1980-luvun lopulla, mutta jatkui 1990-luvulle.
  • Holm, Pasi; Honkapohja, Seppo; Koskela, Erkki (1990)
    Bank of Finland Research Discussion Papers 24/1990
    The paper formulates a model of wage determination in accordance with the notion of a monopoly union determining wages after which the firm decides on employment. The novelty is to incorporate investment and capital decisions by firms. In the theoretical part the subgame-perfect Nash equilibrium and its comparative statics for wages, capital stock and employment are characterized in various cases.
  • Evans, George W.; Honkapohja, Seppo (2002)
    Suomen Pankin keskustelualoitteita 29/2002
    We review the recent work on interest rate setting, which emphasizes the desirability of designing policy to ensure stability under private agent learning.Appropriately designed expectations based rules can yield optimal rational expectations equilibria that are both determinate and stable under learning.Some simple instrument rules and approximate targeting rules also have these desirable properties.We take up various complications in implementing optimal policy, including the observability of key variables and the required knowledge of structural parameters.An additional issue that we take up concerns the implications of expectation shocks not arising from transitional learning effects. Key words: commitment, interest rate setting, adaptive learning, stability, determinacy, expectations shocks JEL classification numbers: E52, E31, D84
  • Honkapohja, Seppo; Mitra, Kaushik (2015)
    Bank of Finland Research Discussion Papers 9/2015
    Published in Manchester School, Volume 83, Issue Supplement S2, pages 27–59, September 2015
    We examine global dynamics under learning in New Keynesian models with price level targeting that is subject to the zero lower bound. The role of forward guidance is analyzed under transparency about the policy rule. Properties of transparent and non-transparent regimes are compared to each other and to the corresponding cases of inflation targeting. Robustness properties for different regimes are examined in terms of the domain of attraction of the targeted steady state and volatility of inflation, output and interest rate. We analyze the effect of higher inflation targets and large expectational shocks for the performance of these policy regimes.
  • Honkapohja, Seppo; Pikkarainen, Pentti (1992)
    Bank of Finland Research Discussion Papers 36/1992
    The paper studies empirically how different country characteristics are associated with the choice of a country's exchange rate regime. The sample consists of 140 economies, both developing and industrialized nations. When countries are classified according to their current exchange rate arrangements, we observe that small countries with low diversification of exports are the most likely candidates to peg their exchange rates. Other country characteristics, like the level of development, openness of the real or financial sector, geographical diversification of exports, and fluctuations in the terms of trade, have hardly any power in explaining the choice of a country's exchange rate system. Somewhat surprisingly it is developing countries which have moved towards more flexible exchange rate practices during the last 10 years. Meanwhile countries with well diversified exports have adopted more rigid exchange rate arrangements. In the light of our evidence and "conventional wisdom" the emerging monetary unification among the EC countries is somewhat peculiar. On the one hand, the EMS countries are quite large and rich, they are well integrated financially, and their trade is well diversified. According to "conventional wisdom" economies of this type tend to be floaters rather than restrict fluctuations in exchange rates. On the other hand, the EMS economies are very open in terms of the real sector, and terms of trade fluctuations have been very low in the EMS countries. Traditionally, such economies are considered to restrict fluctuations in exchange rates. The estimating models predict the following pressures. Firstly, Italy, Spain, and the United Kingdom should have floating exchange rates. Secondly, Israel, New Zealand, and Switzerland should adopt more rigid practices than their current ones. Thirdly, Finland should be in the group of limited flexibility (like the EMS) rather than peg to a basket or float.
  • Evans, George W.; Honkapohja, Seppo; Kaushik, Mitra (2010)
    Bank of Finland Research Discussion Papers 13/2010
    Published in Journal of Money, Credit and Banking, 44. 7 (Oct 2012): 1259-1283
    This paper shows that the Ricardian Equivalence proposition can continue to hold when expectations are not rational and are instead formed using adaptive learning rules. In temporary equilibrium, with given expectations, Ricardian Equivalence holds under the standard conditions for its validity under rational expectations. Furthermore, Ricardian Equivalence holds for paths of temporary equilibria under learning provided suitable additional conditions on learning dynamics are satisfied. New cases of failure of the Ricardian proposition emerge under learning. Most importantly, agents expectations must not depend on government financial variables under deficit financing.
  • Honkapohja, Seppo (2015)
    Suomen Pankki. Blogi
    Viime viikon torstaina 22.1.2015 Euroopan keskuspankki teki historiallisen päätöksen viime syksynä käynnistetyn omaisuuserien osto-ohjelmansa merkittävästä laajentamisesta. Eurojärjestelmä ryhtyy maaliskuusta 2015 alkaen ostamaan jälkimarkkinoilta euroalueen valtioiden, valtiosidonnaisten laitosten ja yleiseurooppalaisten laitosten arvopapereita. Aikaisemmin päätetyt ostot kohdistuvat ainoastaan katettuihin joukkolainoihin ja omaisuusvakuudellisiin arvopapereihin.
  • Evans, George W.; Honkapohja, Seppo (2009)
    Bank of Finland Research Discussion Papers 24/2009
    We examine global economic dynamics under infinite-horizon learning in a New Keynesian model in which the interest-rate rule is subject to the zero lower bound. As in Evans, Guse and Honkapohja, European Economic Review (2008), we find that under normal monetary and fiscal policy the intended steady state is locally but not globally stable. Unstable deflationary paths can arise after large pessimistic shocks to expectations. For large expectation shocks that push interest rates to the zero lower bound, temporary increases in government spending can effectively insulate the economy from deflation traps
  • Evans, George W.; Honkapohja, Seppo (2007)
    Bank of Finland Research Discussion Papers 32/2007
    Expectations about the future are central for determination of current macroeconomic outcomes and the formulation of monetary policy. Recent literature has explored ways for supplementing the benchmark of rational expectations with explicit models of expectations formation that rely on econometric learning. Some apparently natural policy rules turn out to imply expectational instability of private agents' learning. We use the standard New Keynesian model to illustrate this problem and survey the key results for interest-rate rules that deliver both uniqueness and stability of equilibrium under econometric learning. We then consider some practical concerns such as measurement errors in private expectations, observability of variables and learning of structural parameters required for policy. We also discuss some recent applications, including policy design under perpetual learning, estimated models with learning, recurrent hyperinflation, and macroeconomic policy to combat liquidity traps and deflation. Keywords: imperfect knowledge, learning, interest-rate setting, fluctuations, stability, determinacy JEL classification numbers: E52, E31, D84
  • 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.
  • 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
  • Mitra, Kaushik; Evans, George W.; Honkapohja, Seppo (2019)
    Macroeconomic Dynamics 1
    Published in Bank of Finland Research Discussion Papers 5/2012 http://urn.fi/URN:NBN:fi:bof-20140807316
    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, which is in sharp contrast to the implausibly low values under RE. Positive effects of fiscal policy are demonstrated during times of economic stress like the recent Great Recession. Finally, it is shown how learning can lead to consumption and investment dynamics empirically documented during some episodes of “fiscal consolidations.”
  • Evans, George W.; Honkapohja, Seppo (2003)
    Suomen Pankin keskustelualoitteita 10/2003
    Using New Keynesian models, we compare Friedman's k-percent money supply rule to optimal interest rate setting, with respect to determinacy, stability under learning and optimality.We first review the recent literature.Open-loop interest rate rules are subject to indeterminacy and instability problems, but a properly chosen expectations-based rule yields determinacy and stability under learning, and implements optimal policy.We then show that Friedman's rule also can generate equilibria that are determinate and stable under learning.However, in computing the mean quadratic welfare loss, we find that for calibrated models Friedman's rule performs poorly compared to the optimal interest rate rule. Key words: monetary policy, determinacy, stability under learning JEL classification numbers: E52, E31
  • Honkapohja, Seppo; Turunen-Red, Arja H.; Woodland, Alan D. (2011)
    Bank of Finland Research Discussion Papers 9/2011
    Published in Canadian Journal of Economics, 49, 2016: 1441-1469
    We study a many-country endogenous growth model in which decisions about innovation and new investment are influenced by growth expectations. Adaptive learning dynamics determine the country-specific short-run transition paths. The countries differ in basic structural parameters and may impose tariffs on imports of capital goods. Numerical experiments illustrate the adjustment dynamics that follow the use of tariffs. We show that countries that limit trade in capital goods can experience dynamic gains both in growth and in utility and that such gains persist longer the larger the structural advantages of the region that applies tariffs. Substantial differences in levels of innovation, consumption, output and utility can appear, and asymmetries in economic outcomes that were present before trade restrictions are made more severe.
  • Evans, George W.; Honkapohja, Seppo (2011)
    Bank of Finland Research Discussion Papers 8/2011
    Expectations play a central role in modern macroeconomics. The econometric learning approach, in line with the cognitive consistency principle, models agents as forming expectations by estimating and updating subjective forecasting models in real time. This approach provides a stability test for RE equilibria and a selection criterion in models with multiple equilibria. Further features of learning such as discounting of older data, use of misspecified models or heterogeneous choice by agents between competing models generate novel learning dynamics. Empirical applications are reviewed and the roles of the planning horizon and structural knowledge are discussed. We develop several applications of learning with relevance to macroeconomic policy: the scope of Ricardian equivalence, appropriate specification of interest-rate rules, implementation of price-level targeting to achieve learning stability of the optimal RE equilibrium and whether, under learning, price-level targeting can rule out the deflation trap at the zero lower bound.
  • Benhabib, Jess; Evans, George W.; Honkapohja, Seppo (2012)
    Bank of Finland Research Discussion Papers 27/2012
    We examine global dynamics under infinite-horizon learning in New Keynesian models where the interest-rate rule is subject to the zero lower bound. As in Evans, Guse and Honkapohja (2008), the intended steady state is locally but not globally stable. Unstable deflationary paths emerge after large pessimistic shocks to expectations. For large expectation shocks that push interest rates to the zero bound, a temporary fiscal stimulus or a policy of fiscal austerity, appropriately tailored in magnitude and duration, will insulate the economy from deflation traps. However "fiscal switching rules" that automatically kick in without discretionary fine tuning can be equally effective. JEL Classification: E63, E52, E58. Keywords: Adaptive Learning, Monetary Policy, Fiscal Policy, Zero Interest Rate Lower Bound
  • Honkapohja, Seppo (2015)
    Bank of Finland Research Discussion Papers 18/2015
    Published in Empirica, Issue 2, 1 May (2016): 235-256
    ​Many central banks have lowered their interest rates close to zero in response to the crisis since 2008. In standard monetary models the zero lower bound (ZLB) constraint implies the existence of a second steady state in addition to the inflation-targeting steady state. Large scale asset purchases (APP) have been used as a tool for easing of monetary policy in the ZLB regime. I provide a theoretical discussion of these issues using a stylized general equilibrium model in a global nonlinear setting. I also review briefly the empirical literature about effects of APP’s.
  • Honkapohja, Seppo; McClung, Nigel (2021)
    Bank of Finland Research Discussion Papers 6/2021
    This paper considers the performance of average inflation targeting (AIT) policy in a New Keynesian model with adaptive learning agents. Our analysis raises concerns regarding robustness of AIT when agents have imperfect knowledge. In particular, the target steady state can be locally unstable under learning if details about the policy are not publicly available. Near the low steady state with interest rates at the zero lower bound, AIT does not necessarily outperform a standard inflation targeting policy. Policymakers can improve outcomes under AIT by (i) targeting a discounted average of inflation, or (ii) communicating the data window for the target.
  • Honkapohja, Seppo; Mitra, Kaushik (2002)
    Bank of Finland. Discussion papers 3/2002
    Recent models of monetary policy have analysed the desirability of different optimal and ad hoc interest-rate rules under the restrictive assumption that forecasts of the private sector and central bank are homogeneous.In this paper, we study from a learning perspective the implications of heterogeneity across forecasts by the central bank and private agents for the performance of interest-rate rules.Key words: adaptive learning, stability, heterogeneity, monetary policy JEL classification numbers: E52, E31, D84
  • 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