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  • 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.
  • Ikonen, Pasi (2017)
    Bank of Finland. Scientific monographs. E 51
    This thesis applies several econometric methods to a selection of country panels to study how growth is influenced by financial development and government debt. The first part presents the thesis discussion, including a synthesis on financial development, government debt, money supply, and economic growth. The second part deepens the discussion with three stand-alone essays. The first essay models how financial development affects growth through utilization of technological innovation. Based on explicit modeling of the innovation channel of finance, the results show a significant and positive sign for the interaction term between the measure of a country’s own innovation and financial development in the most important specifications. This suggests that the innovation channel of finance is likely to be positively relevant to growth. The second essay examines effects of venture capital investment on economic growth in a similar framework. The findings demonstrate that the interaction of venture capital with innovation has a positive and statistically significant coefficient. Further, the joint impact related to venture capital and its interactions is positive in most specifications, suggesting that venture capital is probably a relevant factor for growth. The third essay delves deeply in the effects of general government debt and general government external debt on growth of real GDP. It explores the long-standing endogeneity problem, includes other relevant debt concepts besides government total debt, revisits the issue whether there are threshold values for the government debt ratio, examines the effect of debt on GDP components and structure, uses timely and extensive datasets and extensive robustness analysis, and runs meta-regressions of the results of this and a many of other studies. Even with correction for endogeneity, the study finds modest evidence of a negative and significant growth impact for government debt. The evidence is not robust over all samples and specifications. The final essay also reports evidence of a negative and significant effect of government external debt in the sample of developed economies. The findings overall comport with those of recent papers that conclude that there is no universal threshold value for a government debt ratio that would hold across all countries. Further, government debt appears to decrease the private-investment-to-GDP ratio, but increases the GDP ratio for household consumption. The meta-regression analysis shows that the study’s results on how specification features affect the estimate of the government debt coefficient are broadly in line with those of other studies.
  • Laine, Tatu (ed.) (2015)
    Scientific monographs. E 50
    This simulator seminar book includes twelve chapters dealing with various aspects of quantitative analysis of financial market infrastructures. The topics include, among others, systemic risks, participant behavior, and new monitoring methods of various payment systems. The methodologies vary from payment system simulations to other types of quantitative analysis based e.g. on artificial neural networks as well as GARCH models. These studies have been presented in the Bank of Finland’s simulator seminars during 2012–2014.
  • Itkonen, Juha V.A. (2015)
    Scientific monographs. E 49
    Climate change is one of the greatest market failures of our time. This thesis consists of three essays in which we study the economics of climate change using networks as a theoretical framework. In the first essay, we discover flaws in the foundations of a recent strand of literature estimating the carbon Kuznets curve (CKC). The CKC hypothesizes that carbon dioxide emissions initially increase with economic growth but that the relationship is eventually reversed. The recent literature attempts to estimate the CKC by adding energy consumption as a control variable. Due to model misspecifications related to the econometric methodology and database definitions, the results are biased to support the existence of a CKC. Consequently, the literature underestimates the need for climate policies. In the second essay, we study how social networks might help to explain why differences of opinion about climate change persist across segments of the lay public despite the scientific consensus. To do this, we programmed a Facebook application that collected survey data on concerns about climate change and network data on friendships. We found that respondents tend to have friends with similar concerns as their own, the unconcerned respondents have fewer friends, and any two respondents who disagreed about the seriousness of global warming were less than half as likely to be friends. The results indicate that the structure of the social network may hinder changes in opinions, explaining why opinions persist despite the scientific consensus. The results suggest that the communication of climate science could be improved by strategies that aim to overcome these network effects. In the third essay, we study permit markets which are connected by a network of links. A link allows participants of one emissions trading system to use permits of other systems. In a linked network of markets, foreign regulators can influence domestic policy outcomes even without a direct link. We apply graph theory to study these dependencies between markets to determine who exactly can affect domestic emissions and prices. We characterize the equilibrium’s dependency structure assuming perfect competition and an exogenous trading network. The results help to avoid unexpected foreign interference with domestic policy outcomes and to secure the effectiveness of climate change policies.
  • Herrala, Risto (2012)
    Suomen Pankki. E 48
    Chapter 1 Introduction 11 Chapter 2 Reserve pools 23 Chapter 3 Public intervention and financial crises: an empirical study 43 Chapter 4 Credit conditions and durable consumption: evidence of a strong link 67 Chapter 5 The influence of bank ownership on credit supply: evidence from Russia's recent financial crisis 89 Chapter 6 Conclusions 109
  • Taipalus, Katja (2012)
    Suomen Pankki. E 47
    To promote the financial stability, there is a need for an early warning system to signal the formation of asset price misalignments. This research provides two novel methods to accomplish this task. Results in this research shows that the conventional unit root tests in modified forms can be used to construct early warning indicators for bubbles in financial markets. More precisely, the conventional augmented Dickey-Fuller unit root test is shown to provide a basis for two novel bubble indicators. These new indicators are tested via MC simulations to analyze their ability to signal emerging unit roots in time series and to compare their power with standard stability and unit root tests. Simulation results concerning these two new stability tests are promising: they seem to be more robust and to have more power in the presence of changing persistence than the standard stability and unit root tests. When these new tests are applied to real US stock market data starting from 1871, they are able to signal most of the consensus bubbles, defined as stock market booms for example by the IMF, and they also flash warning signals far ahead of a crash. Also encouraging are the results with these methods in practical applications using equity prices in the UK, Finland and China as the methods seem to be able to signal most of the consensus bubbles from the data. Finally, these early warning indicators are applied to data for several housing markets. In most of the cases the indicators seem to work relatively well, indicating bubbles before the periods which, according to the consensus literature, are seen as periods of sizeable upward or downward movements. The scope of application of these early warning indicators could be wide. They could be used eg to help determine the right timing for the start of a monetary tightening cycle or for an increase in countercyclical capital buffers. Key words: asset prices, financial crises, bubbles, indicator, unit-root JEL classification: C15, G01, G12
  • Koivu, Tuuli (2012)
    Suomen Pankki. E 46
    China's economic development has been exceptionally robust since the end of the 1970s, and the country has already emerged as the second biggest economy in the world. In this study, we seek to illuminate the role of the monetary policy in this successful economic performance and as a part of the extensive economic reforms of the last two decades. The five empirical essays seek to discover which monetary policy tools are the most used and most effective for guiding China's economic development. In addition, we explore which monetary policy transmission channels are functioning and to what extent monetary policy impacts inflation and real economic developments in China. The results indicate that the conduct of monetary policy in China differs substantially from what is typical for an advanced market economy, where an independent central bank often aims to hit an inflation target by simply controlling the target interest rate. First, China's monetary policy toolkit is highly diverse. Besides a collection of administrated interest rates, it contains quantitative policy tools and direct guidelines. Second, China's central bank is not independent in its decision-making. For these reasons, it is exceptionally challenging to measure the monetary policy stance or to distinguish monetary policy from other macroeconomic policies in China's case. This has been taken into account in this study by using a variety of monetary-policy indicators. Our results suggest that China's monetary-policy implementation and its transmission to the real economy still rely heavily on quantitative policy tools and direct guidelines; interest rates play a much smaller role, in terms of both usage and effectiveness. Overall, our findings suggest that the direct link between monetary policy and real economic performance is weak in China. On the other hand, this study clearly shows that monetary policy has played a key role in price developments, which tells us that monetary policy has been an important factor in China's economic success. Key words: China, monetary policy, economic growth, inflation, exchange rates JEL classification: E50, P30
  • Hellqvist, Matti; Laine, Tatu (2012)
    Suomen Pankki. E 45
    Chapter 1 Matti Hellqvist - Tatu Laine Introduction 9 Chapter 2 Klaus Abbink - Ronald Bosman - Ronald Heijmans - Frans van Winden Disruptions in large value payment systems: An experimental approach 15 Chapter 3 Edward Denbee - Rodney Garratt - Peter Zimmerman Methods for evaluating liquidity provision in real-time gross settlement payment systems 53 Chapter 4 Ronald Heijmans - Richard Heuver Is this bank ill? The diagnosis of doctor TARGET2 77 Chapter 5 Tatu Laine - Tuomas Nummelin - Heli Snellman Combining liquidity usage and interest rates on overnight loans: an oversight indicator 119 Chapter 6 Ronald Heijmans - Richard Heuver - Daniëlle Walraven Monitoring the unsecured interbank money market using TARGET2 data 135 Chapter 7 Luca Arciero Evaluating the impact of shocks to the supply of overnight unsecured money market funds on the TARGET2- Banca d'Italia functioning: a simulation study 169 Chapter 8 Ashwin Clarke - Jennifer Hancock Participant operational disruptions: the impact of system design 193 Chapter 9 Horatiu Lovin Systemically important participants in the ReGIS payment system 219 Chapter 10 Marc Pröpper - Iman van Lelyveld - Ronald Heijmans Network dynamics of TOP payments 235 Chapter 11 Carlos León - Clara Machado - Freddy Cepeda - Miguel Sarmiento Systemic risk in large value payments systems in Colombia: a network topology and payments simulation approach 267 Chapter 12 Horatiu Lovin - Andra Pineta Operational risk in ReGIS - a systemically important payment system 315 Chapter 13 Robert Oleschak - Thomas Nellen Does SIC need a heart pacemaker? 341 Chapter 14 Robert Arculus - Jennifer Hancock - Greg Moran The impact of payment system design on tiering incentives 379 Chapter 15 Martin Diehl - Uwe Schollmeyer Liquidity-saving mechanisms: quantifying the benefits in TARGET2 411 Chapter 16 Biliana Alexandrova-Kabadjova - Francisco Solís-Robleda The Mexican experience in how the settlement of large payments is performed in the presence of high volume of small payments 431
  • Ronkainen, Vesa (2012)
    Suomen Pankki. E 44
    1 Introduction 11 1.1 Motivation 11 1.2 Pension insurance and riskmanagement 12 1.3 Solvency II 15 1.4 Value-at-Risk (VaR) 18 1.5 Insurancemodeling 19 2 Equity index model 23 2.1 Data on equity returns 23 2.2 Model specification and preliminary estimation 29 2.3 Parameter uncertainty via Markov Chain Monte-Carlo 35 2.4 Simulation of future equity returns 38 3 Bond index model 44 3.1 Mediumtermbond index data 45 3.2 Reviewof interest ratemodeling approaches 48 3.3 Model specification and estimation 51 3.4 Parameter uncertainty 57 4 Mortality model 66 4.1 Introduction 66 4.2 Data 67 4.3 Review of the Lee-Cartermodel 69 4.4 Parameter uncertainty in the Lee-Carter model 73 4.5 Gender-specificmortality 77 4.6 The local bilinearmodel 83 5 Dependence modeling 88 5.1 Introduction 88 5.2 Model structure 90 5.3 Model specification 92 5.4 Simulation 94 6 Pension insurance applications 94 6.1 Introduction 94 6.2 Annuity premium and risk analysis for a cohort aged 65 95 6.3 Annuity premium and risk analysis for multiple cohorts 106 6.4 Annuities fromthe customer's point of view 109 7 Discussion 113 8 Appendix 124 8.1 Model implementation example 124
  • Freystätter, Hanna (2012)
    Suomen Pankki. E 43
    Chapter 1: Introduction 9 Chapter 2: Price setting behaviour in an open economy and the determination of Finnish foreign trade prices 29 Chapter 3: Financial market disturbances as sources of business cycle fluctuations in Finland 79 Chapter 4: Financial factors in the boom-bust episode in Finland in the late 1980s and early 1990s 127
  • Leinonen, Harry (2009)
    Suomen Pankki. E 42
    This publication consists of ten separate studies on payment and settlement systems employing simulation techniques. Most of these were carried out using the payment and settlement system simulator BoF-PSS2 provided by the Bank of Finland. The preliminary versions were presented at the annual simulator seminars arranged by the Bank in 2007 and 2008. The main focus of the analyses is on continuity arrangements, operational stability, liquidity requirements, liquidity economising, gridlock resolution, transaction queuing arrangements, network features and network topologies. The studies examine systems in several countries and cover different kinds of payment systems and regimes.
  • Grönqvist, Charlotta (2009)
    Suomen Pankki. E 41
    Tiivistelmä 4 Acknowledgements 5 Introduction 9 Essay 1: The private value of patents by patent characteristics: evidence from Finland 43 Essay 2: Why does the private patent value differ by assignee? 61 Essay 3: Do the assignee's characteristics affect the private value of patents? 97 Essay 4: The optimal patent length is shorter than 18 years 131
  • 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
  • Leinonen, Harry (2007)
    Suomen Pankki. E 39
    Chapter 1 Harry Leinonen Introduction 9 Chapter 2 Kimmo Soramäki - Walter Beyeler - Morten Bech - Rober Glass New approaches for payment system simulation research 15 Chapter 3 Fabien Renault - Jean-Baptiste Pecceu From PNS to TARGET2: the cost of FIFO in RTGS payment system 41 Chapter 4 Neville M. Arjani Examining the tradeoff between settlement delay and intraday liquidity in Canada's LVTS: a simulation approach 87 Chapter 5 Kei Imakubo - James J. McAndrews Funding levels for the new accounts in the BOJ-NET 123 Chapter 6 Ana Lasaosa - Merxe Tudela Risks and efficiency gains of a tiered structure in large-value payments: a simulation approach 149 Chapter 7 Stefan W Schmitz - Claus Puhr Risk concentration, network structure and contagion in the Austrian Real Time Interbank Settlement System 183 Chapter 8 Elisabeth Ledrut How can banks control their exposure to a failing participant? 227 Chapter 9 Darcey McVanel The impact of unanticipated defaults in Canada's Large Value Transfer System 253 Chapter 10 Matti Hellqvist - Heli Snellman Simulation of operational failures in equities settlement 283
  • Snellman, Heli (2006)
    Suomen Pankki. E 38
    This study discusses the effects of the Automated Teller Machine (ATM) network market structure on the availability of cash withdrawal ATM services and cash usage.The aim and novelty of the study is to construct the ATM equation.The study also contributes to the earlier discussion on the effects of ATMs on cash usage.The monopolisation of ATM network market structure and its effects on the number of ATMs and on cash in circulation are analysed both theoretically and empirically.The unique annual data set on 20 countries used in the estimations has been combined from various data sources.The observation period is 1988-2003, but the data on some countries are available only for a shorter period.Based on our theoretical discussion, as well as the estimation results, monopolisation of the ATM network market structure is associated with a smaller number of ATMs.Furthermore, the influence of the number of ATMs on cash in circulation is ambiguous. Key words: ATM, ATM network, monopolisation, demand for cash JEL classification: C33, E41, G2, C11
  • Arola, Mika (2006)
    Suomen Pankki. E 37
    The main objective of the study is to evaluate the Finnish central government's foreign borrowing between the years 1862 and 1938. Most of this period was characterised by deep capital market integration that bears resemblance to the liberal world financial order at the turn of the millennium.The main aim is to analyse the credit risk associated with the state and its determination by evaluating the world financial market centres' perception of Finland.By doing this, the study is also expected to provide an additional dimension to Finland's political and economic history by incorporating into the research the assessments of international capital markets regarding Finland during a period that witnessed profound political and economic changes in Finnish society.The evaluation of the credit risk mainly relies on exchange-rate risk free time series of the state's foreign bonds.They have been collected from quotations in the stock exchanges in Helsinki, Hamburg, Paris and London.In addition, it investigates Finland's exposure to short-term debt and Moody's credit ratings assigned to Finland.The study emphasises the importance of the political risk. It suggests that the hey-day of the state's reliance on foreign capital markets took place during last few decades of the 19th century when Finland enjoyed a wide autonomy in the Russian Empire and prudently managed its economy, highlighted in Finland's adherence to the international gold standard.Political confrontations in Finland and, in particular, in Russia and the turbulence of the world financial system prevented the return of this beneficial position again.Through its issuance of foreign bonds the state was able to import substantial amounts of foreign capital, which was sorely needed to foster economic development in Finland.Moreover, the study argues that the state's presence in the western capital markets not only had economic benefits, but it also increased the international awareness of Finland's distinct and separate status in the Russian Empire and later underlined its position as an independent republic. Keywords: credit risk, government borrowing, financial market, government bonds, state finances JEL classification: E65, G15, H63, N13
  • Solanko, Laura (2006)
    Suomen Pankki. E 36
    This study comprises an introductory section and three essays analysing Russia's economic transition from the early 1990s up to the present.The papers present a combination of both theoretical and empirical analysis on some of the key issues Russia has faced during its somewhat troublesome transformation from state-controlled command economy to market-based economy. The first essay analyses fiscal competition for mobile capital between identical regions in a transition country.A standard tax competition framework is extended to account for two features of a transition economy: the presence of two sectors, old and new, which differ in productivity; and a non-benevolent regional decision-maker.It is shown that in very early phase of transition, when the old sector clearly dominates, consumers in a transition economy may be better off in a competitive equilibrium. Decision-makers, on the other hand, will prefer to coordinate their fiscal policies. The second essay uses annual data for 1992- 2003 to examine income dispersion and convergence across 76 Russian regions.Wide disparities in income levels have indeed emerged during the transition period.Dispersion has increased most among the initially better-off regions, whereas for the initially poorer regions no clear trend of divergence or convergence could be established.Further, some albeit not highly robust evidence was found of both unconditional and conditional convergence, especially among the initially richer regions.Finally, it is observed that there is much less evidence of convergence after the economic crisis of 1998. The third essay analyses industrial firms' engagement in provision of infrastructure services, such as heating, electricity and road maintenance.Using a unique dataset of 404 large and medium-sized industrial enterprises in 40 regions of Russia, the essay examines public infrastructure provision by Russian industrial enterprises. It is found that to a large degree engagement in infrastructure provision, as proxied by district heating production, is a Soviet legacy.Secondly, firms providing district heating to users outside their plant area are more likely to have close and multidimensional relations with the local public sector. Key words: Russia, transition, regional issues, tax competition, infrastructure
  • Taipalus, Katja (Edita Prima, 2006)
    Suomen Pankki. E 35
    Tests for unit roots in log dividend yields, which are consistent with 'rational bubbles' in stock prices, are conducted for the SP500 and Finnish stock market indexes.In addition to the traditional unit root tests, we split the data into 10-year segments and use frequency domain analysis to test for the presence of unit roots in the dividend yield data.The results strongly suggest the existence of bubbles in both the US and Finnish markets.Finally we develop a novel dividend yield-based method to track periods when stock prices divert their fundamental levels. This indicator produces promising results, as it seems to have some forecasting ability concerning booms and busts in the stock markets. Key words: equity price, bubble, rolling ADF
  • Mehrotra, Aaron (Edita Prima, 2006)
    Suomen Pankki. 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
  • Railavo, Jukka (Edita Prima, 2006)
    Suomen Pankki. E 33
    Economic and Monetary Union (EMU) can be characterised as a complicated set of legislation and institutions governing monetary and fiscal responsibilities.The measures of fiscal responsibility are to be guided by the Stability and Growth Pact (SGP), which sets rules for fiscal policy and makes a discretionary fiscal policy virtually impossible.To analyse the effects of the fiscal and monetary policy mix, we modified the New Keynesian framework to allow for supply effects of fiscal policy.We show that defining a supply-side channel for fiscal policy using an endogenous output gap changes the stabilising properties of monetary policy rules. The stability conditions are affected by fiscal policy, so that the dichotomy between active (passive) monetary policy and passive (active) fiscal policy as stabilising regimes does not hold, and it is possible to have an active monetary - active fiscal policy regime consistent with stability of the economy.We show that, if we take supply-side effects into account, we get more persistent inflation and output reactions.We also show that the dichotomy does not hold for a variety of different fiscal policy rules based on government debt and budget deficit, using the tax smoothing hypothesis and formulating the tax rules as difference equations. The debt rule with active monetary policy results in indeterminacy, while the deficit rule produces a determinate solution with active monetary policy, even with active fiscal policy.The combination of fiscal requirements in a rule results in cyclical responses to shocks.The amplitude of the cycle is larger with more weight on debt than on deficit.Combining optimised monetary policy with fiscal policy rules means that, under a discretionary monetary policy, the fiscal policy regime affects the size of the inflation bias.We also show that commitment to an optimal monetary policy not only corrects the inflation bias but also increases the persistence of output reactions.With fiscal policy rules based on the deficit we can retain the tax smoothing hypothesis also in a sticky price model. Keywords: inflation, fiscal policy, fiscal policy rules, optimalmonetary policy, policy coordination, stabilisation