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

  • Stanisławska, Ewa; Paloviita, Maritta (2021)
    Bank of Finland Research Discussion Papers 10/2021
    Using the ECB Consumer Expectations Survey, this paper investigates how consumers revise medium-term inflation expectations. We provide robust evidence of their adjustment to the current economic developments. In particular, consumers adjust medium-term inflation views in response to changes in short-term inflation expectations and, to a lesser degree, to changes in perceptions of current inflation. We find that the strong adverse Covid-19 pandemic shock contributed to an increase in consumer inflation expectations. We show that consumers who declare high trust in the ECB adjust their medium-term inflation expectations to a lesser degree than consumers with low trust. Our results increase understanding of expectations formation, which is an important issue for medium-term oriented monetary policy.
  • Kilponen, Juha; Vilmunen, Jouko; Vähämaa, Oskari (2021)
    Bank of Finland Research Discussion Papers 9/2021
    Macroeconomic models typically assume additively separable preferences where consumption enters the utility function in a logarithmic form. This restriction implies that consumption growth is highly sensitive to movements in real interest rates, which in turn implies an unrealistically steep demand curve and intertemporal trade-off. We re-estimate the stylized New Keynesian Model with US data using King-Plosser-Rebelo (1988) preferences with and without habits and show that the equilibrium real interest rate elasticity of output is in the range of 0.05 − 0.20 in the US. Such low real interest rate elasticity is better in line with the empirical consumption Euler equation literature and implies relatively weak transmission of monetary policy to output and inflation.
  • Martins, Manuel M. F.; Verona, Fabio (2021)
    Bank of Finland Research Discussion Papers 8/2021
    Policymakers and researchers see inflation characterized by cyclical fluctuations driven by changes in resource utilization and temporary shocks, around a trend influenced by inflation expectations. We study the in-sample inflation dynamics and forecast inflation out-of-sample by analyzing a New Keynesian Phillips Curve (NKPC) in the frequency domain. In-sample, while inflation expectations dominate medium-to-long-run cycles, energy prices dominate short cycles and business-to-medium cycles once expectations became anchored. While statistically significant, unemployment is not economically relevant for any cycle. Out-of-sample, forecasts from a low-frequency NKPC significantly outperform several benchmark models. The long-run component of unemployment is key for such remarkable forecasting performance.
  • Granziera, Eleonora; Jalasjoki, Pirkka; Paloviita, Maritta (2021)
    Bank of Finland Research Discussion Papers 7/2021
    We test for bias and efficiency of the ECB inflation forecasts using a confidential dataset of ECB macroeconomic quarterly projections. We investigate whether the properties of the forecasts depend on the level of inflation, by distinguishing whether the inflation observed by the ECB at the time of forecasting is above or below the target. The forecasts are unbiased and efficient on average, however there is evidence of state dependence. In particular, the ECB tends to overpredict (underpredict) inflation at intermediate forecast horizons when inflation is below (above) target. The magnitude of the bias is larger when inflation is above the target. These results hold even after accounting for errors in the external assumptions. We also find evidence of inefficiency, in the form of underreaction to news, but only when inflation is above the target. Our findings bear important implications for the ECB forecasting process and ultimately for its communication strategy.
  • Honkapohja, Seppo; McClung, Nigel (2021)
    Bank of Finland Research Discussion Papers 6/2021
    This paper considers the performance of average inflation targeting (AIT) policy in a New Keynesian model with adaptive learning agents. Our analysis raises concerns regarding robustness of AIT when agents have imperfect knowledge. In particular, the target steady state can be locally unstable under learning if details about the policy are not publicly available. Near the low steady state with interest rates at the zero lower bound, AIT does not necessarily outperform a standard inflation targeting policy. Policymakers can improve outcomes under AIT by (i) targeting a discounted average of inflation, or (ii) communicating the data window for the target.