Bank of Finland Research Discussion Papers (1988- )


The Bank of Finland Discussion Paper series publishes academic research by economists in the Research Unit and the Bank more broadly, as well as by visiting scholars. The topics are relevant from the point of view of the Bank's strategic aims and contribute to the Bank's research focus on the interplay between and stability of the financial markets and the macroeconomy. Not all Discussion Papers for the years 1989–1994 are available electronically.

Recent Submissions

  • Sihvonen, Markus (2021)
    Bank of Finland Research Discussion Papers 15/2021
    I analyze time series momentum along the Treasury term structure. Past bond returns predict future returns both due to autocorrelation in bond risk premia and because unexpected bond return shocks increase the premium. Yield curve momentum is primarily due to autocorrelation in yield changes rather than autocorrelation in bond carry and can largely be captured using a single bond return or yield change factor. Because yield changes are partly induced by changes in the federal funds rate, yield curve momentum is related to post-FOMC announcement drift. The momentum factor is unspanned by the information in the term structure today and is hence inconsistent with standard term structure, macrofinance and behavioral models. I argue that the results are consistent with a model with unpriced longer term dependencies.
  • Eo, Yunjong; McClung, Nigel (2021)
    Bank of Finland Research Discussion Papers 14/2021
    We evaluate and compare alternative monetary policy rules, namely average inflation targeting, price level targeting, and traditional inflation targeting rules, in a standard New Keynesian model that features recurring, transient zero lower bound regimes. We use determinacy and expectational stability (E-stability) of equilibrium as the criteria for stabilization policy. We find that price level targeting policy, including nominal income targeting as a special case, most effectively promotes determinacy and E-stability among the policy frameworks, whereas standard inflation targeting rules are prone to indeterminacy. Average inflation targeting can induce determinacy and E-stability effectively, provided the averaging window is sufficiently long.
  • Andreasen, Martin M.; Caggiano, Giovanni; Castelnuovo, Efrem; Pellegrino, Giovanni (2021)
    Bank of Finland Research Discussion Papers 13/2021
    This paper uses a nonlinear vector autoregression and a non-recursive identification strategy to show that an equal-sized uncertainty shock generates a larger contraction in real activity when growth is low (as in recessions) than when growth is high (as in expansions). An estimated New Keynesian model with recursive preferences and approximated to third order around its risky steady state replicates these state-dependent responses. The key mechanism behind this result is that firms display a stronger upward nominal pricing bias in recessions than in expansions, because recessions imply higher inflation volatility and higher marginal utility of consumption than expansions.
  • D'Acunto, Francesco; Hoang, Daniel; Paloviita, Maritta; Weber, Michael (2021)
    Bank of Finland Research Discussion Papers 12/2021
    Many consumers below the top of the distribution of a representative population by cognitive abilities barely react to monetary and fiscal policies that aim to stimulate consumption and borrowing, even when they are financially unconstrained and despite substantial debt capacity. Differences in income, formal education levels, economic expectations, and a large set of registry-based demographics do not explain these facts. Heterogeneous cognitive abilities thus act as human frictions in the transmission of economic policies that operate through the household sector and might imply redistribution from low- to high-cognitive ability agents. We conclude by discussing how our findings inform the microfoundation of behavioral macroeconomic theory.
  • Eusepi, Stefano; Gibbs, Chris; Preston, Bruce (2021)
    Bank of Finland Research Discussion Papers 11/2021
    We study zero interest-rate policy in response to a large negative demand shock when long-run expectations can fall over time. Because falling expectations make monetary policy less effective by raising real interest rates, the optimal forward guidance policy makes large front-loaded promises to stabilize expectations. Policy is too stimulatory in the event of transitory shocks, but provides insurance against persistent shocks. The optimal policy is well-approximated by a constant calendar-based forward guidance, independent of the shock’s realised persistence. The insurance property distinguishes our paper from other bounded rationality papers that solve the forward guidance puzzle and generates important quantitative differences.