Browsing by Author "Juselius, Mikael"

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  • Drehmann, Mathias; Juselius, Mikael; Korinek, Anton (2017)
    Bank of Finland Research Discussion Papers 12/2017
    When taking on new debt, borrowers commit to a pre-specified path of future debt service. This implies a predictable lag between credit booms and peaks in debt service which, in a panel of household debt in 17 countries, is four years on average. The lag is driven by two key features of the data: (i) new borrowing is strongly auto-correlated and (ii) debt contracts are long term. The delayed increase in debt service following an impulse to new borrowing largely explains why credit booms are associated with lower future output growth and higher probability of crisis. This provides a systematic transmission channel whereby credit expansions can have adverse long-lasting real effects.
  • Juselius, Mikael (2008)
    Bank of Finland Research Discussion Papers 6/2008
    This paper derives the cointegration spaces that are implied by linear rational expectations models when data are I(1). The cointegration implications are easy to calculate and can be readily applied to test if the models are consistent with the long-run properties of the data. However, the restrictions on cointegration only form a subset of all the cross-equation restrictions that the models place on data. The approach is particularly useful in separating potentially data-consistent models from the remaining models within a large model family. Moreover, the approach provides useful information on the empirical shock structure of the data. Keywords: rational expectations, cointegration JEL classification numbers: C52
  • Juselius, Mikael; Tarashev, Nikola (2021)
    BoF Economics Review 3/2021
    While corporate credit losses have been low since the start of the Covid-19 pandemic, their future evolution is quite uncertain. Using a forecasting model with a solid track record, we find that the baseline scenario (“expected losses”) is benign up to 2024. This is due to policy support measures that have kept debt service costs low. However, high indebtedness, built up when the pandemic impaired real activity, suggests increased tail risks: plausible deviations from the baseline scenario (“unexpected losses”) feature ballooning corporate insolvencies. Taken at face value, the low expected loss forecasts are consistent with low bank provisions, whereas the high unexpected loss forecasts call for substantial capital.
  • Ambrocio, Gene; Juselius, Mikael (2020)
    BoF Economics Review 2/2020
    The main problem facing policymakers during the corona virus pandemic is how to mitigate its humanitarian and economic costs. Doing so invariably involves trading off some costs against others as well as short-term against longer-term consequences. We provide an overview of economic literature that is relevant for understanding these trade-offs in the context of the current pandemic. We also discuss a range of fiscal measures that can be adopted with the aim of achieving the preferred trade-offs at lowest cost.
  • Juselius, Mikael; Kim, Moshe; Ringbom, Staffan (2009)
    Bank of Finland Research Discussion Papers 12/2009
    Persistent shifts in equilibria are likely to arise in oligopolistic markets and may be detrimental to the measurement of conduct, related markups and intensity of competition. We develop a cointegrated VAR (vector autoregression) based approach to detect long-run changes in conduct when data are difference stationary. Importantly, we separate the components in markups which are exclusively related to long-run changes in conduct from those explained solely by fundamentals. Our approach does not require estimation of markups and conduct directly, thereby avoiding complex problems in existing methodologies related to multiple and changing equilibria. Results from applying the model to US and five major European banking sectors indicate substantially different behavior of conventional raw markups and conduct-induced markups. Keywords: markups, cointegration, VAR, macroeconomic fundamentals, competition, banking JEL classification numbers: C32, C51, G20, L13, L16
  • Juselius, Mikael; Tarashev, Nikola (2020)
    Bank of Finland Research Discussion Papers 18/2020
    Extending a standard credit-risk model illustrates that a single factor can drive both expected losses and the extent to which they may be exceeded in extreme scenarios, ie “unexpected losses.” This leads us to develop a framework for forecasting these losses jointly. In an application to quarterly US data on loan charge-offs from 1985 to 2019, we find that financial-cycle indicators – notably, the debt service ratio and credit-to-GDP gap – deliver reliable real-time forecasts, signalling turning points up to three years in advance. Provisions and capital that reflect such forecasts would help reduce the procyclicality of banks’ loss-absorbing resources.
  • Drehmann, Mathias; Juselius, Mikael; Korinek, Anton (2018)
    Bank of Finland Research Discussion Papers 10/2018
    Traditional economic models have had difficulty explaining the non-monotonic real effects of credit booms and, in particular, why they have predictable negative after-effects for up to a decade. We provide a systematic transmission mechanism by focusing on the flows of resources between borrowers and lenders, i.e. new borrowing and debt service. We construct the first cross-country dataset of these flows for a panel of house-hold debt in 16 countries. We show that new borrowing increases economic activity but generates a pre-specified path of debt service that reduces future economic activity. The protracted response in debt service derives from two key analytic properties of credit booms: (i) new borrowing is auto-correlated and (ii) debt contracts are long term. We confirm these properties in the data and show that debt service peaks on average four years after credit booms and is associated with significantly lower output and higher crisis risk. Our results explain the transmission mechanism through which credit booms and busts generate non-monotonic and long-lasting aggregate demand effects and are, hence, crucial for macroeconomic stabilization policy.
  • Juselius, Mikael; Takáts, Előd (2021)
    Journal of Economic Dynamics and Control July
    Published in BoF DP 8/2018.
    Demography accounts for a large share of low frequency inflation variation in 22 countries from 1870 to 2016. The dependent population (young and old) is associated with higher, and the working age population with lower inflation. The relationship is robust across different sub-samples and specifications, including dynamic Phillips curve settings, suggesting that it is not spurious. The observed pattern is broadly consistent with delayed monetary policy responses to demography-induced changes in the natural interest rate.
  • Granziera, Eleonora; Haavio, Markus; Juselius, Mikael; Kortelainen, Mika; Vilmi, Lauri (2018)
    Euro & talous 1/2018
    Kansainvälisen finanssikriisin jälkeen useat keskuspankit laskivat ohjauskorkonsa lähelle nollaa tai jopa sen alle ja ottivat käyttöön epätavanomaisia rahapoliittisia toimia, kuten ennakoivaa viestintää ja laajamittaisia omaisuuserien osto-ohjelmia. Finanssikriisi ja sitä seurannut Euroopan velkakriisi toivat esiin reaalitalouden ja rahoitusmarkkinoiden väliset tiiviit kytkökset. Uusi toimintaympäristö on haastanut myös rahapolitiikan mallinnuksen - ja koko makrotaloustieteen.
  • Juselius, Mikael; Drehmann, Mathias (2020)
    Oxford Bulletin of Economics and Statistics 2
    Published in Bank of Finland Research Discussion Papers 3/2016 http://urn.fi/URN:NBN:fi:bof-201604051073
    In addition to leverage, the debt service burden of households and firms is an important link between financial and real developments at the aggregate level. Using US data from 1985 to 2017, we find that the debt service burden has sizeable negative effects on expenditure. Its interplay with leverage also explains several data puzzles, including the lack of above trend output growth during credit booms and the severity of ensuing recessions, without appealing to large shocks or nonlinearities. Estimating the model with data up to 2005, it predicts credit and expenditure paths that closely match actual developments before and during the Great Recession.
  • Juselius, Mikael; Drehmann, Mathias (2016)
    Bank of Finland Research Discussion Papers 3/2016
    Also available in Oxford Bulletin of Economics and Statistics 82 ; 2 https://doi.org/10.1111/obes.12330
    In addition to leverage, the debt service burden of households and firms is an important link between financial and real developments at the aggregate level. Using US data from 1985 to 2013, we find that the debt service burden has sizeable negative effects on expenditure. Its interplay with leverage also explains several data puzzles, such as the lack of above-trend output growth during credit booms and the depth and length of ensuing recessions, without appealing to large shocks or non-linearities. Using data up to 2005, our model predicts paths for credit and expenditure that closely match actual developments before and during the Great Recession.
  • Gyllenberg, Frida; Juselius, Mikael; Gissler, Mika; Heikinheimo, Oskari (2018)
    American Journal of Public Health 4 ; April 2018
    Objectives. To evaluate whether a public program providing long-acting reversible contraceptive (LARC) methods free of charge increases the LARC initiation rate and reduces the unintended pregnancy rate in the general population. Methods. Since 2013, all women in Vantaa, Finland, have been entitled to 1 LARC method free of charge. With time-series analysis between 2000 and 2015, we assessed whether this public program was associated with changes in steady-state mean rates of LARC initiation and abortions. Results. The initiation rate of LARCs (1/1000 women) increased 2.2-fold from 1.9 to 4.2 after the intervention (P < .001). Concomitantly, the abortion rate (1/1000 women) declined by 16% from 1.1 to 0.9 in the total sample (P < .001), by 36% from 1.3 to 0.8 among those aged 15 to 19 years (P < .001), and by 14% from 2.0 to 1.7 among those aged 20 to 24 years (P = .01). Conclusions. The LARC program was associated with increased uptake of LARC methods and fewer abortions in the population. Public Health Implications. Entitling the population to LARC methods free of charge is an effective means to reduce the unmet need of contraception and the need for abortion, especially among women younger than 25 years.
  • Juselius, Mikael; Borio, Claudio; Disyatat, Piti; Drehmann, Mathias (2016)
    Bank of Finland Research Discussion Papers 24/2016
    Published in International Journal of Central Banking, 13, 3, September 2017: 55-89 http://www.ijcb.org/journal/ijcb17q3a2.htm
    Do the prevailing unusually and persistently low real interest rates reflect a decline in the natural rate of interest as commonly thought? We argue that this is only part of the story. The critical role of financial factors in influencing medium-term economic fluctuations must also be taken into account. Doing so for the United States yields estimates of the natural rate that are higher and, at least since 2000, decline by less. As a result, policy rates have been persistently and systematically below this measure. Moreover, we find that monetary policy, through the financial cycle, has a long-lasting impact on output and, by implication, on real interest rates. Therefore, a narrative that attributes the decline in real rates primarily to an exogenous fall in the natural rate is incomplete. The influence of monetary and financial factors should not be ignored. Exploiting these results, an illustrative counterfactual experiment suggests that a monetary policy rule that takes financial developments systematically into account during both good and bad times could help dampen the financial cycle, leading to higher output even in the long run.
  • Juselius, Mikael; Borio, Claudio; Disyatat, Piti; Drehmann, Mathias (2017)
    International Journal of Central Banking 4 ; September
    Published in Bank of Finland Research Discussion Papers 24/2016.
    Do the prevailing unusually and persistently low real interest rates reflect a decline in the natural rate of interest as commonly thought? We argue that this is only part of the story. The critical role of financial factors in influencing mediumterm economic fluctuations must also be taken into account. Doing so for the United States yields estimates of the natural rate that are higher and, at least since 2000, decline by less. An illustrative counterfactual experiment suggests that a monetary policy rule that takes financial developments systematically into account during both good and bad times could help dampen the financial cycle, leading to significant output gains and little change in inflation.
  • Granziera, Eleonora; Haavio, Markus; Juselius, Mikael; Kortelainen, Mika; Vilmi, Lauri (2018)
    Bank of Finland. Bulletin 1/2018
    In the aftermath of the global financial crisis many central banks cut their policy rates close to zero or even below and introduced non-standard monetary policy measures. The financial crisis and the European debt crisis that followed demonstrated the importance of the linkages between financial markets and the real economy. In this article we survey the open issues in economic research posed by limits on how low central banks are able to cut policy rates, and the unconventional measures, especially forward guidance and large scale asset purchase programmes.
  • Juselius, Mikael; Takáts, Előd (2016)
    Bank of Finland Research Discussion Papers 4/2016
    We uncover a puzzling link between low-frequency inflation and the population age-structure: the young and old (dependents) are inflationary whereas the working age population is disinflationary. The relationship is not spurious and holds for different specifications and controls in data from 22 advanced economies from 1955 to 2014. The age-structure effect is economically sizable, accounting eg for about 6.5 percentage points of US disinflation from 1975 to today’s low inflation environment. It also accounts for much of inflation persistence, which challenges traditional narratives of trend inflation. The age-structure effect is forecastable and will increase inflationary pressures over the coming decades.
  • Juselius, Mikael (2015)
    Suomen Pankki. BoF online 4/2015
    1 Introduction 3 2 Deregulation, competition and efficiency in the literature 4 3 Measuring the degree of product market regulation 6 3.1 The Product Market Regulation indicator 7 3.2 Product market regulation in non-manufacturing industries 9 3.3 Caveats 9 4 Product market regulation in Finland 10 4.1 Key Finnish product market reforms from 1998 to 2008 12 5 Quantitative assessments of reforms in Finland 13 5.1 Estimated productivity gains of reforms from 1998 to 2008 14 5.2 Potential for future productivity gains 15 6 Conclusions 17 References 18 Appendix A (detailed PMR tables for Finland) 20 Appendix B (econometric estimates) 22
  • Juselius, Mikael; Takáts, Előd (2018)
    Bank of Finland Research Discussion Papers 8/2018
    Published in Journal of Economic Dynamics and Control 2021 ; 128 ; July as 'Inflation and demography through time' https://doi.org/10.1016/j.jedc.2021.104136
    Demographic shifts, such as population ageing, have been suggested as possible explanations for the recent decade-long spell of low inflation. We identify age structure effects on inflation from cross-country variation in a panel of 22 countries from 1870 to 2016 that includes standard monetary factors. We document a robust relationship that is in line with the lifecycle hypothesis: a larger share of dependent population is inflationary, whereas a larger share of working age population is disinflationary. This relationship accounts for the bulk of trend inflation, for instance, about 7 percentage points of US disinflation since the 1980s. It predicts rising inflation over the coming decades.
  • Juselius, Mikael; Tarashev, Nikola (2022)
    Bank of Finland Research Discussion Papers 4/2022
    A parsimonious extension of a well-known portfolio credit-risk model allows us to study a salient stylized fact – abrupt switches between high- and low-loss phases– from a risk-management perspective. As uncertainty about phase switches increases, expected losses decouple from unexpected losses, which reflect a high percentile of the loss distribution. Banks that ignore this decoupling have shortfalls of loss-absorbing resources, which is more detrimental if the portfolio is more diversified within a phase. Likewise, the risk-management benefits of improving phase-switch forecasts increase with diversification. The analysis of these findings leads us to an empirical method for comparing the degree of within-phase default clustering across portfolios.
  • Borio, Claudio; Disyatat, Piti; Juselius, Mikael; Rungcharoenkitkul, Phurichai (2017)
    Bank of Finland Research Discussion Papers 36/2017
    Forthcoming in International Journal of Central Banking.
    Prevailing explanations of the decline in real interest rates since the early 1980s are premised on the notion that real interest rates are driven by variations in desired saving and investment. But based on data stretching back to 1870 for 19 countries, our systematic analysis casts doubt on this view. The link between real interest rates and saving-investment determinants appears tenuous. While it is possible to find some relationships consistent with the theory in some periods, particularly over the last 30 years, they do not survive over the extended sample. This holds both at the national and global level. By contrast, we find evidence that persistent shifts in real interest rates coincide with changes in monetary regimes. Moreover, external influences on countries’ real interest rates appear to reflect idiosyncratic variations in interest rates of countries that dominate global monetary and financial conditions rather than common movements in global saving and investment. All this points to an underrated role of monetary policy in determining real interest rates over long horizons.