Browsing by Subject "VAR"

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  • Ripatti, Antti; Saikkonen, Pentti (1998)
    Suomen Pankin keskustelualoitteita 29/1998
    We extend the conventional cointegrated VAR model to allow for general nonlinear deterministic trends.These nonlinear trends can be used to model gradual structural changes in the intercept term of the cointegrating relations.A general asymptotic theory of estimation and statistical inference is reviewed and a diagnostic test for testing the correct specification of an employed nonlinear trend is developed.The methods are applied to Finnish interest rate data.A smooth level shift of the logistic form between the own-yield of broad money and the short-term money market rate is found appropriate for these data.The level shift is motivated by the deregulation of issuing certificates of deposit and its inclusion in the model solves the puzzle of 'missing cointegration vector' found in a previous study. Keywords: cointegrated VAR model, gradual structural change, nonlinear deterministic trend
  • 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
  • Paloviita, Maritta (2008)
    Suomen Pankki. E 40
    1 Introduction . 10 2 Alternative models for optimal price setting 16 2.1 Basic model with endogenous supply 17 2.2 Optimal price setting models . 21 2.2.1 Optimal price setting with fully flexible prices 21 2.2.2 Optimal non-overlapping price setting with nominal rigidities . 23 2.2.3 Optimal overlapping price setting with nominal rigidities . 26 3 Three Phillips curve relationships 28 3.1 The New Classical Phillips curve 29 3.2 The New Keynesian Phillips curve 31 3.3 The Hybrid Phillips curve 34 4 Related studies 36 5 Review of the articles 41 References 44
  • 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.
  • Mehrotra, Aaron (Edita Prima, 2006)
    Bank of Finland studies. E 34
    This thesis consists of four essays in empirical macroeconomics. The first three essays examine the conduct of monetary policy during a disinflationary and deflationary era, with the policy interest rates close to or at the zero bound.The questions of interest include the potency of the interest rate channel, the stability of broad money demand, and the possibility to use the exchange rate channel in order to affect economic activity and the price level.We use time series econometrics techniques, mainly vector autoregressions, focusing on Japan.While we find that basic relationships between the variables appear unaltered by deflation, a further stimulative impact is difficult to implement once the zero bound is hit.This can be due to political reasons, as in the case of introducing a tax on currency in order to bring about negative interest rates, or because the needed stimulus is very big, as in the case of yen depreciation to increase the price level.The last essay focuses on the fiscal policy aspects of the European Union's most recent enlargement.We examine whether the fiscal austerity required by the Maastricht criteria and the Stability and Growth Pact would be harmful for the socio-economic development of the new Member States.Introducing an indicator for socio-economic development and utilizing instrumental variables regressions, we find that fiscal retrenchment, including a lower level of public debt, would be advantageous for development.A policy implication is to maintain the Stability and Growth Pact or an equivalent intergovernmental fiscal rule to curb public spending and debt. Keywords: deflation, disinflation, zero lower bound, broadly defined liquidity, socio-economic development, Stability and Growth Pact, EU enlargement
  • Junttila, Juha (2002)
    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
  • Nyberg, Henri; Saikkonen, Pentti (2012)
    Bank of Finland Research Discussion Papers 33/2012
    Published in Computational Statistics & Data Analysis, Volume 76, August 2014, Pages 536-555
    We propose simulation-based forecasting methods for the noncausal vector autoregressive model proposed by Lanne and Saikkonen (2012). Simulation or numerical methods are required because the prediction problem is generally nonlinear and, therefore, its analytical solution is not available. It turns out that different special cases of the model call for different simulation procedures. Simulation experiments demonstrate that gains in forecasting accuracy are achieved by using the correct noncausal VAR model instead of its conventional causal counterpart. In an empirical application, a noncausal VAR model comprised of U.S. inflation and marginal cost turns out superior to the bestfitting conventional causal VAR model in forecasting inflation. Keywords: Noncausal vector autoregression, forecasting, simulation, importance sampling, inflation. JEL codes: C32, C53, E3l.AC
  • Gulan, Adam; Haavio, Markus; Kilponen, Juha (2014)
    Bank of Finland bulletin. Economic outlook 3
    The Finnish economy has experienced three major recessions over the last 25 years, all very different in nature. The turn of the century witnessed the bursting of the dot-com bubble in the ‘Nokia economy’. The country was also severely hit by the global financial crisis of 2007–2008 and the ‘Great Recession’ that followed. However, the most serious episode was the prolonged contraction of the early 1990s, known in Finland as the ‘Finnish Great Depression’. In this article, we use an empirical structural vector autoregression approach to identify different factors that could explain the Finnish business cycle, and the 1990–1993 contraction in particular. We estimate the model of a small open economy, in which we identify both real and financial shocks, from both the demand and the supply side. Shocks are identified by using state-of-the-art sign restrictions methodology. Our approach allows us to study the propagation mechanisms of the shocks and the role of macro-financial linkages. In comparison with earlier studies of the Finnish Great Depression, our approach allows us to quantify the relative importance of different factors.
  • Caggiano, Giovanni; Castelnuovo, Efrem (2021)
    Bank of Finland Research Discussion Papers 1/2021
    We estimate a novel measure of global financial uncertainty (GFU) with a dynamic factor framework that jointly models global, regional, and country-specific factors. We quantify the impact of GFU shocks on global output with a VAR analysis that achieves self-identifcation via a combination of narrative, sign, ratio, and correlation restrictions. We find that the world output loss that materialized during the great recession would have been 13% lower in absence of GFU shocks. We also unveil the existence of a global finance uncertainty multiplier: the more global financial conditions deteriorate after GFU shocks, the larger the world output contraction is.
  • 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
  • Granziera, Eleonora; Moon, Hyungsik Roger; Schorfheide, Frank (2018)
    Quantitative Economics 3 ; November ; 2018
    Published in NBER Working Papers 17140 (2011).
    There is a fast growing literature that set-identifies structural vector autoregressions (SVARs) by imposing sign restrictions on the responses of a subset of the endogenous variables to a particular structural shock (sign-restricted SVARs). Most methods that have been used to construct pointwise coverage bands for impulse responses of sign-restricted SVARs are justified only from a Bayesian perspective. This paper demonstrates how to formulate the inference problem for sign-restricted SVARs within a moment-inequality framework. In particular, it develops methods of constructing confidence bands for impulse response functions of sign-restricted SVARs that are valid from a frequentist perspective. The paper also provides a comparison of frequentist and Bayesian coverage bands in the context of an empirical application - the former can be substantially wider than the latter.
  • Pyyhtiä, Ilmo (1994)
    Suomen Pankin keskustelualoitteita 14/1994
    This paper is an extension of earlier studies by the writer on the influence of innovations on investment plans.It examines the effects of a change in the financial market regime on the revision of investment plans.The innovations in economic data were measured with the error terms of the VAR model.The VAR model was estimated to demand, user cost of capital and total labour costs in the manufacturing industry.Innovation terms calculated in this way were added to the OLS model, in which the realized investments of manufacturing firms are explained by survey data on investment plans collected by the Bank of Finland.In the earlier studies of the writer innovations are formed using ARIMA models and survey data.The estimation results confirm the findings of the earlier revision models of investment plans.Unpredicted economic innovations alter investment plans and the signs of the estimated coefficients are the expected ones, positive for demand innovations and negative for capital cost and wage cost innovations.The conclusion drawn is that financial market liberalization has not influenced the revision of investment plans.The parameters of the investment plan model are also stable after financial market liberalization.
  • Saarenheimo, Tuomas (1996)
    Bank of Finland. Discussion papers 15/1996
    The possible participation of Finland in the Stage m of the European Monetary Union would constitute a major change in the operating environment of the Finnish economy.As a member of the common currency area, Finnish interest and exchange rates would no longer be determined by domestic monetary policy or domestic financial market reactions, but would instead be given by the European Central Bank and the European financial markets.Would this increase the severity of business cycles in Finland?This is the question the present paper seeks to analyze. In the first part of this paper, we review and evaluate the existing econometric work on the consequences of the European Monetary Union.Although the empirical work on the subject is abundant, it suffers from a narrow focus.Most of the research follow a highly simplistic empirical implementation of the traditional Keynesian theory of optimal currency areas and measure the desirability of a currency union is by cross-country correlations of certain macroeconomic variables.We find the results obtained in those studies hard to interpret, and argue that - particularly when measured in a mixed exchange-rate system as has prevailed in Europe - simple macroeconomic correlations do not convey any meaningful information about the desirability of a currency union. In the second part we present an alternative approach to the empirical analysis of the topic.We construct a structural vector error-correction system to quantify the extent to which monetary autonomy has served to stabilize the real economy in Finland.This model is applied to analyze directly the consequences of Finland's possible entry into the European Monetary Union. The results suggest that monetary autonomy has played some role in insulating the real economy from the effects of shocks.In particular, adjustments of the nominal exchange rate appear to have stabilized the real interest rate and, consequently, smoothed the changes in domestic demand.However, this role has been relatively small, and given the uncertainties involved, it is possible that the effect has actually been negligible.Overall, we find no strong evidence to support a claim that monetary autonomy has served to stabilize significantly the Finnish economy. Key words: EMU, optimal currency area, Finland, structural VAR models
  • Castelnuovo, Efrem; Surico, Paolo (2009)
    Bank of Finland Research Discussion Papers 30/2009
    This paper re-examines the VAR evidence on the price puzzle and proposes a new theoretical interpretation. Using actual data and two identification strategies based on zero restrictions and model-consistent sign restrictions, we find that the positive response of prices to a monetary policy shock is historically limited to the sub-samples that are typically associated with a weak interest rate response to inflation. Using pseudo data generated by a sticky price model of the US economy, we then show that the structural VARs are capable of reproducing the price puzzle only when monetary policy is passive. The omission in the VARs of a variable capturing expected inflation is found to account for the price puzzle observed in simulated and actual data.
  • Lanne, Markku; Saikkonen, Pentti (2009)
    Bank of Finland Research Discussion Papers 18/2009
    In this paper, we propose a new noncausal vector autoregressive (VAR) model for non-Gaussian time series. The assumption of non-Gaussianity is needed for reasons of identifiability. Assuming that the error distribution belongs to a fairly general class of elliptical distributions, we develop an asymptotic theory of maximum likelihood estimation and statistical inference. We argue that allowing for noncausality is of importance in empirical economic research, which currently uses only conventional causal VAR models. Indeed, if noncausality is incorrectly ignored, the use of a causal VAR model may yield suboptimal forecasts and misleading economic interpretations. This is emphasized in the paper by noting that noncausality is closely related to the notion of nonfundamentalness, under which structural economic shocks cannot be recovered from an estimated causal VAR model. As detecting nonfundamentalness is therefore of great importance, we propose a procedure for discriminating between causality and noncausality that can be seen as a test of nonfundamentalness. The methods are illustrated with applications to fiscal foresight and the term structure of interest rates.
  • Evans, George W.; Honkapohja, Seppo (2003)
    Suomen Pankin keskustelualoitteita 22/2003
    In this paper we consider inflation and government debt dynamics when monetary policy employs a global interest rate rule and private agents' forecasts using adaptive learning.Because of the zero lower bound on interest rates, active interest rate rules are known to imply the existence of a second, low inflation steady state, below the target inflation rate.Under adaptive learning dynamics we find the additional possibility of a liquidity trap, in which the economy slips below this low inflation steady state and is driven to an even lower inflation floor which, in turn, is supported by a switch to an aggressive money supply rule.Fiscal policy alone cannot push the economy out of the liquidity trap. However, raising the threshold at which the money supply rule is employed can dislodge the economy from the liquidity trap and ensure a return to the target equilibrium.Key words: stability of equilibria, fiscal and monetary policy, interest rate and money supply rules JEL classification numbers: E63, E52, E58
  • Mikosch, Heiner; Neuwirth, Stefan (2015)
    BOFIT Discussion Papers 13/2015
    This paper presents a MIDAS type mixed frequency VAR forecasting model. First, we propose a general and compact mixed frequency VAR framework using a stacked vector approach. Second, we integrate the mixed frequency VAR with a MIDAS type Almon lag polynomial scheme which is designed to reduce the parameter space while keeping models fexible. We show how to recast the resulting non-linear MIDAS type mixed frequency VAR into a linear equation system that can be easily estimated. A pseudo out-of-sample forecasting exercise with US real-time data yields that the mixed frequency VAR substantially improves predictive accuracy upon a standard VAR for dierent VAR specications. Forecast errors for, e.g., GDP growth decrease by 30 to 60 percent for forecast horizons up to six months and by around 20 percent for a forecast horizon of one year.
  • Pestova, Anna; Mamonov, Mikhail (2019)
    BOFIT Discussion Papers 13/2019
    We employ a Bayesian VAR model to estimate the economic effects on the Russian economy from Western financial sanctions imposed in 2014. Sanctions caused a decrease in the amount of out-standing Russian corporate external debt, but it occurred during an episode of falling oil prices. We disentangle the effects of sanctions and oil prices by computing out-of-sample projections of key Russian macroeconomic variables conditioned solely on the oil price drop and on both the oil price drop and external debt deleveraging. Declining oil prices alone do not explain the depth of economic crisis in Russia, but we get rather accurate conditional forecasts when the actual path of external debt deleveraging is added. We treat the difference between these two projections as the effect of sanctions against Russia. The effect is modest, yet significant, for most of the variables discussed. While our estimate of the impact of sanctions on GDP growth has large uncertainty, over two-thirds of the density lies in the negative area.
  • Hasko, Harri (2007)
    Bank of Finland Research Discussion Papers 28/2007
    Shocks to monetary and fiscal policy have played a major role in public debt developments in the OECD countries since the mid-1970s. According to the applied VAR approach, these shocks, taken together, explained, on average, about half of the forecast error variation in the debt to GDP ratio, while the share of shocks to GDP growth was close to 30 percent. In contrast, shocks to inflation and the debt ratio itself played in most cases only a minor role. However, the inflation shocks were vital in initiating the public debt problems, as the increase in actual inflation, and particularly the persistence of high inflation expectations in the 1980s, led to a prolonged period of high real interest rates. Learning the implications of greater monetary discipline therefore gave rise to `some unpleasant fiscal arithmetic' which aggravated debt problems. In most countries fiscal policy aimed at correcting the deterioration in fiscal balances, but the progress was in most cases slow and delayed. It is noticeable that public debt developments have been quite similar in both the United States and the euro area despite differences in fiscal policy and the role of the public sector. Shocks to GDP growth, inflation and monetary policy, which have been more similar in both continents, explain about two thirds of the forecast error variation of the debt to GDP ratio, while shocks to fiscal policy explain about 20 percent. Keywords: public debt dynamics, fiscal policy, monetary policy, VAR models JEL classification numbers: E62, H62, C22
  • Ahonen, Jukka; Pyyhtiä, Ilmo (1996)
    Suomen Pankin keskustelualoitteita 5/1996
    Tämän keskustelualoitteen tarkoituksena on koota ja syventää Euroopan talous- ja rahaliiton kolmannen vaiheen eduista ja haitoista pienelle avotaloudelle tehtyjä empiirisiä selvityksiä.Rahaliittoa koskevassa keskustelussa on todettu yhteisen valuutan edut suurimmiksi maille, joilla on keskenään runsaasti kauppaa ja joiden tuotanto on voimakkaasti yhdentynyt.Pienen avotalouden katsotaan hyötyvän lisäksi erityisesti rahaliiton mukanaan tuomasta valuutan uskottavuuden lisääntymisestä ja sitä kautta alemmasta ja vakaammasta reaalikorosta. Suomen teollisuuden tuotantorakennetta sekä tuotannon, viermin, yksikkötyökustannusten, efektiivisen valuuttakurssin ja kannattavuuden vaihtelua verrataan EU-maiden vastaaviin tunnuslukuihin.Lisäksi tutkitaan teollisuustuotannon riippuvuutta ja häiriöalttiutta suhteessa muihin EU-maihin. Aiempia tarkasteluja täydennetään Suomen, Ruotsin ja Saksan aineistoille estimoidulla vektoriautoregressiivisellä mallilla. Selvityksen tulosten mukaan Suomen talous on yksi avoimempia suhteessa EUmaihin.Lähentymistä on lisännyt varsinkin idänkaupan loppuminen ja Ruotsin liittyminen EU:hun.Toisaalta Suomen teollisuuden tuotantorakenne poikkeaa Keski-Euroopan maista ja tuotannon vaihtelu on ollut suurempaa.Eniten EU-maista Suomea muistuttaa Ruotsi. Alustavien VAR-estimointien mukaan vuosina 1975-94 OECD:n teollisuustuotantoon kohdistuneet häiriöt vaikuttivat Suomen, Ruotsin ja Saksan teollisuustuotantoihin samanaikaisesti ja symmetrisesti.Vientihintasokit olivat taas Suomessa ja Ruotsissa suurempia kuin Saksassa.Häiriöt reaaliseen valuuttakurssiin toivat myös Suomessa ja Ruotsissa vastoin Saksaa epävakautta teollisuustuotantoon. Asiasanat: EMU, Suomi, teollisuus, rahapolitiikka