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  • Keloharju, Matti; Malkamäki, Markku; Nyborg, Kjell G.; Rydqvist, Kristian (2002)
    Suomen Pankin keskustelualoitteita; Bank of Finland. Discussion papers 16/2002
    This paper presents a descriptive analysis of the primary and secondary market for Finnish treasury bonds.The paper focuses on three issues.First, we report basic descriptive statistics such as auction volumes and secondary market yields and volumes.Second, we estimate the revenues earned by primary dealers from the treasury bond market.Third, we analyse the development of the price of the auctioned bonds, relative to other benchmark bonds, around the time of the auction.We find evidence of a price decrease in the auctioned bond series before the auction and a price increase after the auction.This pattern is strongest for 1992-1994 when Treasury funding needs were heavy and secondary market trading volume of treasury bonds was modest. Key words: treasury bond auctions, secondary market JEL classification numbers: D44, G12, G20
  • Jokivuolle, Esa; Peura, Samu (2001)
    Suomen Pankin keskustelualoitteita; Bank of Finland. Discussion papers 15/2001
    The rating-sensitive capital charges on credit risks under the new Basel Accord are likely to increase the volatility of minimum capital requirements, which may force banks to hold larger capital cushions in excess of minimum requirements.We analyse this claim on the basis of numerical simulations on hypothetical bank portfolios, in which the bank's choice of capital cushion is assumed to satisfy a value-at-risk-type constraint.The results suggest that the size of the cushion depends on the bank's credit portfolio risk and its chosen approach for calculating the minimum capital requirement.Although the more ratings-sensitive internal ratings based approach imposes lower minimum capital requirements on sufficiently high-quality credit portfolios than does the standardised approach, this capital relief is countered by the need for larger relative cushions under the former approach.The results imply that the cushions induced by greater rating sensitivity may influence both banks' choices between proposed approaches for calculating capital requirements as well as the aggregate level of post-reform bank capital.Hence these cushions should be given due consideration in the final calibration of the Basel risk weights. Key words: new Basel Capital Accord, credit risk, internal ratings, value-at-risk
  • Hasan, Iftekhar; Malkamäki, Markku (2000)
    Suomen Pankin keskustelualoitteita; Bank of Finland. Discussion papers 20/2000
    This paper investigates the existence and extent of economies of scale and scope among stock exchanges.Evidence from 38 exchanges in 32 countries and 4 continents around the world for the years 1989-1998 indicates the existence of significant economies of scale and scope.The degree of such economies however differs by size of exchange and region.The largest stock exchanges show an increasing trend of cost effectiveness.Exchanges in North America and Europe report substantially larger economies of scale than those in the Asia-Pacific regions. Keywords: stock exchanges, mergers, regional alliances, economies of scale
  • Malkamäki, Markku (1999)
    Suomen Pankin keskustelualoitteita; Bank of Finland. Discussion papers 4/1999
    This is the first paper that examines economies of scale in stock exchanges.The data employed in the study include cost and output statistics for 37 stock exchanges in four continents around the world for the year 1997.I estimate two traditional cost functions and find that ray (overall) scale economies exist only in the very large stock exchanges but that there are significant scale economies with respect to one of the outputs, ie the processing of trades.On the other hand, there are not equally clear scale advantages related to activities involving company-specific information.There are thus opposing forces, some tending to increase standardization and scale and others favouring the continuization of more localized facilities.The outcome of increasing competition may be not be the amalgamation of exchanges but instead the centralization of certain functions, eg the trading function, and continued realization of others on a decentralized basis.There is nonetheless an obvious incentive for closer and deeper cooperation between European stock exchanges.
  • Mayes, David G.; Virén, Matti (2000)
    Suomen Pankin keskustelualoitteita; Bank of Finland. Discussion papers 11/2000
    Published in Economic Modelling, Vol. 22, No 2, March 2005: 219-251
    This paper highlights the implications for EU macroeconomic policy at a relatively disaggregated level when key economic relationships are nonlinear or asymmetric.Using data for the EU and OECD countries we show that there are considerable non-linearities and asymmetries in the Phillips and Okun curves.High unemployment has a relatively limited effect in pulling inflation down while low unemployment can be much more effective in driving it up.Downturns in the economy 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 in IS curves across not just countries but also sectors and regions. Key words: aggregation, asymmetry, monetary policy, nonlinear models, Okun curve, Phillips curve
  • Kinnunen, Helvi; Vihriälä, Vesa (1999)
    Suomen Pankin keskustelualoitteita; Bank of Finland. Discussion papers 13/1999
    The paper examines the role of bank relationships in business closures during the Finnish economic crisis of the early 1990s.We utilise a unique panel data set of 474 small and medium-sized firms, for which we have standard accounting information and for which we can in addition identify whether the firm had a lending relationship with the most troubled part of the banking system, namely the Savings Bank of Finland and Skopbank.By estimating a logit model we find that, even accounting for the effects of liquidity, profitability, indebtedness, age and size, firms that had a lending relationship with the savings banks concerned were more likely to close in 1992 than other firms that year or the same firms in other years.Thus being a loan customer of these banks entailed greater risk for firms than having a lending relationship with other intermediaries only in 1992, which was the year the banking sector came to a head.The result lends support to the hypothesis that financial factors affect real outcomes not only through firm and household balance sheets but also through bank behaviour.
  • Välimäki, Tuomas (2002)
    Suomen Pankin keskustelualoitteita; Bank of Finland. Discussion papers 1/2002
    This paper presents a model of the optimal bidding behaviour of a single bank in the context of fixed rate liquidity tenders.Banks' bidding is shown to depend crucially on the central bank's liquidity policy as regards tender allotments.The paper also analyses ECB liquidity policy in terms of the model.The ECB, while applying fixed rate tenders, appears to have been attempting stabilise the market interest rate at a level close to the main refinancing rate.However, this aim was at least partially overridden by that of stabilising total money market liquidity over the course of the reserve maintenance period - even more so when banks were expecting the ECB to raise the main refinancing rate in the near future.The banks' aggregate bids increased considerably during the period of fixed rate tenders.This was seen to result mainly from profit opportunities associated with a positive spread between market interest rate and main refinancing rate.The positive spread resulted from the combination of expectations of an interest rate hike and liquidity-oriented allotment policy.Key words: bidding, money market tenders, liquidity policy, central bank operating framework
  • Halko, Marja-Liisa (2003)
    Suomen Pankin keskustelualoitteita; 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
  • Ripatti, Antti; Vilmunen, Jouko (2001)
    Suomen Pankin keskustelualoitteita; Bank of Finland. Discussion papers 10/2001
    The study demonstrates that the decline in the labour share in Finland can not be explained by the Cobb-Douglas production function.Instead, we propose an approach based on the constant-elasticity-of-substitution (CES) production function with labour- and capital-augmenting technical progress.The model is augmented by imperfect competition in the output market.According to the empirical results based on estimation of the first-order-conditions, the technical elasticity of substitution is significantly less than unity (0.6) and hence the Cobb-Douglas production function is rejected.The growth rate of the estimated labour-augmenting technical progress has decreased in recent years, which is not consistent with the 'new-economy' hypothesis. Capital-augmenting technical trend has exploded during the same period, which provides a possible explanation for the rapid growth of the Solow residual.The main contributing factor behind the declining labour share is, however, the increasing mark-up. Keywords: production function, elasticity of technical substitution, input-augmenting technical progress, new economy
  • Pohjola, Tapio (2002)
    Suomen Pankin keskustelualoitteita; Bank of Finland. Discussion papers 14/2002
    This paper deals with the interaction of fiscal and monetary policy when the central bank is pursuing a price stability-oriented monetary policy.In particular, we study the durability of the price stability regime when public debt accumulates as a result of ultimately unsustainable deficits.The growth of indebtedness causes the collapse of the price stability regime after a period of rising deficits.The budget deficit is endogenously determined in the model, as a result of government's decisions on how to finance its expenditure.The alternative methods of finance are taxes, debt, and seigniorage.Under the price stability regime, only the first two methods are available, but in the long run taxes and seigniorage are the only alternatives.The price stability regime collapses when the public debt reaches an edogenously determined threshold, which makes reneging on price stability as attractive as accumulating more tax burden for the future.We are able to solve for the critical level of debt, the timing of the collapse, and the reaction of taxes to the collapse of the price stability regime. The critical level of debt depends, inter alia, on the level of government consumption, the real interest rate, the velocity of money, and the efficiency-effects of taxation.The results are illustrated by several numerical simulations. Key words: inflation, fiscal policy, fiscal theory of inflation, Stability and Growth Pact
  • Railavo, Jukka (2003)
    Suomen Pankin keskustelualoitteita; Bank of Finland. Discussion papers 34/2003
    In this paper we introduce an application of the supply-side channel for fiscal policy to the basic New Keynesian model.We use a proportional tax rate instead of lump sum tax and introduce the distortions of a tax wedge.We derive a closed economy forward-looking model with government consumption and no capital. Households' labour supply decisions are endogenised.Monetary policy is conducted by a Taylor-type interest rate rule and fiscal policy follows a simple debt rule.We analyse the stability of the model when fiscal policy has both demand and supply-side effects and compare results with the standard case of only demand effects. We show that taking supply-side effects into account restricts the fiscal policy parameter range consistent with the dynamic stability of the economy.We also argue that allowing fiscal policy to affect both supply and demand results in more persistent inflation as well as output responses to shocks, than without the supply-side channel.We also discuss the different monetary and fiscal policy regimes and their implication on the stability of inflation and output. Key words: inflation, fiscal and monetary policy, stabilisation JEL classification numbers: E52, E31, E63
  • Valckx, Nico (2001)
    Suomen Pankin keskustelualoitteita; Bank of Finland. Discussion papers 13/2001
    This paper examines what factors move US and European stock and bond markets, extending earlier work by Campbell and Ammer (1993). Inflation news is incorporated into the stock and bond decomposition and explicit attention is given to different horizons over which expectations are formed.Sensitivities to monetary policy instruments and fundamental factors are examined. The data are monthly.For the euro area, a unique data set is constructed.The results illuminate a number of widely-held pre-conceptions and confirm that inflation news volatility is a non-trivial factor in the stock and bond return decompositions. Key words: stock prices; bond prices; return decompositions, fundamental factors
  • Sierimo, Carolina; Virén, Matti (1995)
    Suomen Pankin keskustelualoitteita; Bank of Finland. Discussion papers 34/1995
    This paper examines the relationships between financial and nonfinancial variables in three Nordic countries (Finland, Norway and Sweden).We try to find out whether there exists some kind of dichotomy between these two sets of variables, both in terms of levels of variables and the respective volatilities.In particular, we scrutinize the role of the stock market (stock prices and stock market turnover) in this respect.The analysis makes use of standard time series analytical tools, cointegration analysis, analysis of Granger causality and cross-spectral analysis.The results of these empirical analyses suggest that, although the behaviour of the financial variables has been quite similar, there are important differences between these three countries.Still, in all countries important relationships between these sets of variables are detected.However, in most cases causality seems to be bidirectional or instantaneous.
  • Kanniainen, Vesa; Leppämäki, Mikko (2002)
    Suomen Pankin keskustelualoitteita; Bank of Finland. Discussion papers 5/2002
    The paper shows that uninformed finance gives rise to excessive entry, both in human-capital-intensive and in conventional industries when the financial institutions cannot identify the entrepreneurial talent.Introduction of informed capital (eg venture capital finance) with superior screening ability results in an institutional equilibrium with efficiency gains in human-capital industries.Contrary to received wisdom, the institutional equilibrium with informed capital is characterised by more limited entry to an industry, which requires highly talented human capital. Unexpectedly, the total welfare effect is ambiguous, as the allocation of non-informed capital is now less efficient in the conventional industry.The institutional equilibrium is shaped by investors' risk preferences, costs of establishing uninformed and informed capital, and the initial distribution ot talent in the economy. Key words: allocation of talent, asymmetric information, financial institutions, venture capital, institutional equilibrium JEL classification numbers: D82, G2, G24
  • Välimäki, Tuomas (2001)
    Suomen Pankin keskustelualoitteita; Bank of Finland. Discussion papers 8/2001
    This paper presents a general equilibrium model of the determination of equilibrium in the interbank market for overnight liquidity when the central bank uses fixed rate tenders in its liquidity provision.We consider three alternative liquidity policy rules.First, the central bank may provide the bid amounts in full. Alternatively, the central bank can scale back the bid amounts pro rata with the individual bids.For the latter case, we consider two target options for the central bank: liquidity or an interest rate. We show that the expected overnight rate remains more tightly in the hands of the central bank if the full allotment procedure or a pure interest rate targeting rule is used than if liquidity targeting is used.We will also demonstrate how optimal bidding in tender operations varies considerably according to which procedure is chosen by the central bank.
  • Junttila, Juha (2002)
    Suomen Pankin keskustelualoitteita; Bank of Finland. Discussion papers 2/2002
    Using recently developed modelling methodology of Economic Tracking Portfolios (ETP), we find that it is possible to forecast future values of inflation and changes in industrial production in the United States and at least three core euro countries - Italy, France and Germany - utilising only current and past financial market information.The longer the forecasting horizon, the better the forecasts based solely on financial market information compared to results from other methods.Of the analysed countries, the overall forecasting performance of the tracking portfolios is the best for the United States, and the method employed here clearly outperforms the forecasting performance of a more traditional VAR approach. Key words: financial markets, forecasting, macroeconomy, euro area, USA
  • Kuo, Biing-Shen; Mikkola, Anne (2000)
    Suomen Pankin keskustelualoitteita; Bank of Finland. Discussion papers 13/2000
    The out-of-sample forecasting performances of two univariate time series presentations for the USD/DEM real exchange rate are compared using quarterly data for the period 1957Q1-1998Q4.The linear AR process is frequently fitted to real exchange rate series because it is sufficient for capturing the reported slow mean reversion in real exchange rates and it has some predictive ability for the long run.A simple nonlinear alternative, the threshold autoregressive (TAR) model, allows for the possibility that there is a band of slow or no convergence around the purchasing power parity level in the real exchange rate, due to transportation costs or other market frictions that create barriers to arbitrage.The TAR model is theoretically and empirically appealing, and it has been fitted to real exchange rates in many recent papers.However, the ultimate test of its usefulness is its out-of-sample forecasting accuracy.We compare the TAR model to its simple linear AR alternative in terms of out-of-sample forecast accuracy. Preliminary results using the RMSE criterion indicate that TAR forecasts are more sensitive to the estimation period and that they involve considerably more uncertainty at long horizons, as compared with the simple AR model.
  • Haavio, Markus; Kauppi, Heikki (2000)
    Suomen Pankin keskustelualoitteita; Bank of Finland. Discussion papers 8/2000
    Recent European data indicate that countries where a large proportion of the population lives in owner-occupied housing are experiencing higher unemployment rates than countries where the majority of people live in private rental housing, which might suggest that rental housing enhances labor mobility.In this paper, we develop a simple intertemporal two-region model that allows us to compare owner-occupied housing markets to rental markets and to analyze how these alternative arrangements allocate people in space and time.Consistent with the empirical observations, we find that the interregional labor market is more fluid under rental housing than under owner-occupation.As a result of greater mobility, the rental arrangement also results in better allocational efficiency than owner-occupation.When dwellings are rented, the decision to move to a booming region is largely based on current productivity, whereas under owner-occupation random wealth effects encourage deviations from this optimal behavior.
  • Brunila, Anne; Hukkinen, Juhana; Tujula, Mika (1999)
    Suomen Pankin keskustelualoitteita; Bank of Finland. Discussion papers 1/1999
    Cyclically adjusted government budget balances have become increasingly popular as a means of analysing the fiscal situation and changes in policy that result from the intentional actions of the government.As the actual budget balances are affected both by cyclical factors ('automatic stabilisers') and structural ('discretionary') measures, they may not, in general, be very useful when seeking to assess the orientation of underlying fiscal policy and possible structural imbalances in the budget balance. The problem however is that there is no generally accepted method of calculating cyclically adjusted (structural) budget balances. The results tend to be fairly noisy and sensitive to the method of calculation.The purpose of this article is to highlight these issues by reviewing three estimation methods used by the Bank of Finland - GDP smoothing based on the Hodrick-Prescott trend estimation method, the production function approach and Blanchard's method - and the corresponding estimates of the cyclically adjusted budget balances for Finland. Keywords: fiscal policy, cyclically adjusted budget balance
  • Kauko, Karlo (2003)
    Suomen Pankin keskustelualoitteita; Bank of Finland. Discussion papers 26/2003
    Published in Journal of Banking & Finance, Volume 31, Issue 10, October 2007, pp. 2962-2977
    Central securities depositories (CSDs) have opened mutual links, but most of them are seldom used.Why are idle links established? By allowing a foreign CSD to offer services through the link the domestic CSD invites competition.The domestic CSD can determine the cost efficiency of the rival by charging suitable fees, and prevent it from becoming more competitive than the domestic CSD.By inviting the competitor the domestic CSD can commit itself not to charge monopoly fees for secondary market services.This enables the domestic CSD to charge high fees in the primary market without violating investors participation constraints. Key words: securities settlement systems, central securities depositories, network industries, access pricing JEL classification numbers: G29, L13