Browsing Bank of Finland Research Discussion Papers (1988- ) by Title

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  • Verona, Fabio; Martins, Manuel M. F.; Drumond, Inês (2013)
    Bank of Finland Research Discussion Papers 4/2013
    Published in International Journal of Central Banking, Volume 9, Number 3, September 2013, Pages 73-117 ; http://www.ijcb.org/journal/ijcb13q3a3.htm
    Motivated by the U.S. events of the 2000s, we address whether a too low for too long interest rate policy may generate a boom-bust cycle. We simulate anticipated and unanticipated monetary policies in state-of-the-art DSGE models and in a model with bond financing via a shadow banking system, in which the bond spread is calibrated for normal and optimistic times. Our results suggest that the U.S. boom-bust was caused by the combination of (i) interest rates that were too low for too long, (ii) excessive optimism and (iii) a failure of agents to anticipate the extent of the abnormally favourable conditions. Keywords: DSGE model, shadow banking system, too low for too long, boom-bust JEL codes: E32, E44, E52, G24
  • Kiema, Ilkka; Jokivuolle, Esa (2013)
    Bank of Finland Research Discussion Papers 25/2013
    The aim of the Internal Ratings Based Approach (IRBA) of Basel II was that capital suffices for unexpected losses with at least a 99.9% probability. However, because only a fraction of the required regulatory capital (a quarter to a half) had to be loss absorbing capital, the actual bank solvency probabilities may have been much lower, as the global financial crisis illustrates. Our estimates suggest that under Basel II IRBA the loss-absorbing capital of an average-quality portfolio bank suffices for unexpected losses with a 95%-99% probability. This translates into an expected bank failure rate as high as once in twenty years. Even if the bank s interest income is incorporated into our model, the expected failure rate is still substantial. We show that the expected failure rate increases with loan portfolio riskiness. Our calculations may be viewed as a measure of regulatory "self-delusion" included in Basel II capital requirements. Keywords: capital requirements, Internal Ratings Based Approach, Basel II,financial crisis.
  • Hlédik, Tibor (2003)
    Suomen Pankin keskustelualoitteita 35/2003
    The paper presents a structural model framework for a small open economy.The model, based on optimising households and firms, has been calibrated on Czech macroeconomic data in order to develop an analytic framework suitable for analysing key policy questions related to the Czech Republic s anticipated EMU accession.In order to be able to use the model for assessing both pre- and post-accession policy issues, two versions of the model fixed and flexible exchange rate versions were developed.The suitability of the two alternative models for policy analysis was subsequently tested on a series of impulse response exercises.The dynamic responses of the two models to selected shocks and policy experiments are plausible.Hence these results suggest that the presented analytic framework can serve as a good starting point for analysing complex policy issues facing the Czech Republic. Key words: monetary policy, monetary union, EMU accession JEL classification numbers: E52, E20, E31, F41
  • Bask, Mikael (2007)
    Bank of Finland Research Discussion Papers 25/2007
    Published in International Journal of Finance and Economics, Volume 19, Issue 2, March 2014, Pages 140-159
    The aim of this paper is to determine whether it would be desirable from the perspective of macroeconomic balance for central banks to take account of nominal exchange rate movements when framing monetary policy. The theoretical framework is a small, open DSGE economy that is closed by a Taylor rule for the monetary authority, and a determinate REE that is least-squares learnable is defined as a desirable outcome in the economy. When the policy rule contains contemporaneous data on the output gap and the CPI inflation rate, the monetary authority does not have to consider the exchange rate as long as there is sufficient inertia in policy-making. In fact, due to a parity condition on the international asset market, interest-rate smoothing and a response to changes in the nominal exchange rate are perfectly intersubstitutable in monetary policy. In other words, we give a rationale for the monetary authority to focus on the change in the nominal interest rate rather than its level in policy-making. Thus, we have a case for interest-rate smoothing. Keywords: determinacy, E-stability, foreign exchange, inertia, Taylor rule JEL classification numbers: E52, F31
  • Marzo, Massimiliano; Romagnoli, Silvia; Zagaglia, Paolo (2008)
    Bank of Finland Research Discussion Papers 25/2008
    We study the term structure implications of the fiscal theory of price level determination. We introduce the intertemporal budget constraint of the government in a general equilibrium model in continuous time. Fiscal policy is set according to a simple rule whereby taxes react proportionally to real debt. We show how to solve for the prices of real and nominal zero coupon bonds. Keywords: bond pricing, fiscal policy, mathematical methods JEL classification numbers: D9, G12
  • Andersen, Kaare Guttorm; Kauko, Karlo (1996)
    Suomen Pankin keskustelualoitteita 13/1996
    The possibilities to improve households' eligibility for long-term housing loans at fixed interest rates has been a current topic of public discussion.Yet, credit institutions have difficulties in granting such loans, unless they themselves can acquire fixed-rate funding.In many cases, the only feasible way for them to raise such funding is to issue bonds.In a number of countries, such arrangements are already in use. In this paper we present a cross-country study of housing finance by mortgagebacked bonds.The paper describes and analyses mortgage credit markets in Denmark, Sweden and the United States of America with respect to the institutional structure, loans and bonds characteristics, legal framework and the security underlying the system.We have found that all three markets differ and that these differences originate from the respective countries' national characteristics and financial histories.In Sweden and the United States in particular, the public sector has been involved in developing the system. Generally, long-term credit is offered in all three countries through relatively well-functioning, efficient markets. However, certain problems are common to all.First, the number of outstanding bond series is relatively large.Second, in many housing loans, the borrower has the option to repay the debt prematurely.In these cases, the credit institution may have to avoid maturity matching problems by issuing bonds with unknown maturity. We briefly review the history and present circumstances of Finnish bond issuing credit institutions to elucidate why such institutions play a marginal role.Long ago, bond-issuing mortgage institutions were an essential part of the Finnish financial market, but legislative obstacles to their operations almost killed the industry after World War II.The tax system favoured ordinary banks, and bond emissions were restricted by government regulations.Now, these legal obstacles have been abolished.In the light of both foreign and past domestic experience, such institutions have a market niche.Finally, we discuss some of the problems related to setting up a bond- financed mortgage credit market in Finland. Key words: Housing loans, bonds, mortgage banks
  • Sipilä, Kari T. (1996)
    Suomen Pankin keskustelualoitteita 1/1996
    The study assesses data communication requirements within the EU as it concerns Member State officials, EU bodies and the Community.A survey of current projects and their backgrounds is given.In addition the division of responsibilities among various bodies of the Commission are discussed. Given the EU's need for some sort of integration of data transfer services is self evident, the study investigates what possible challenges lie ahead as EU integration processes continue and its already large communications requirements continue to grow.For example, while the Commission as well as its empowered bodies have recognized the need for a unified communications architecture, the political will to implement such as system has been lacking.The report recommends the creation of a unified, universal communications architecture, that not only can handle all current types of data transfer, but anticipates growth as well. Key words: The European Union, A Data communication, The Authorities
  • 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
  • Taipalus, Katja (2006)
    Bank of Finland Research Discussion Papers 29/2006
    The dividend yield ratio in the stock markets is, to an extent, comparable to the rent-price ratio in the housing market.Taking advantage of this definitional similarity, one can then use the traditional unit root test for log dividend yield in this case, the log rent-price ratio to test for the existence of real estate bubbles.Such unit root tests are conducted for Finland, USA, UK, Spain and Germany, and the simple test results strongly suggest the existence of bubbles in nearly all of these countries.In addition to this, we develop a continuous and monthly rent-price information-based method to track the periods when real estate prices diverge from their fundamental levels.This indicator seems to work quite well in most cases, indicating bubbles during periods which, according to the consensus literature, are seen as periods of sizable upward or downward shifts in house prices. Key words: house price, bubble, unit root JEL classification numbers: G12
  • Mayes, David G. (1997)
    Suomen Pankin keskustelualoitteita 18/1997
    Viimeisen vuosikymmenen pankkikriisit ovat herättäneet huolestumista monissa teollisuusmaissa.Tässä raportissa tarkastellaan Uudessa-Seelannissa vuonna 1996 käyttöön otetun, julkistamisperiaatteeseen nojautuvan pankkivalvontajärjestelmän etuja.Vaikka Uudella-Seelannilla on monia erityispiirteitä, jotka tekevät uudesta järjestelmästä juuri sille erityisen soveliaan, soveltuvat järjestelmän kaikki pääperiaatteet muuhunkin OECD-alueeseen, myös nykyisen EU-lainsäädännön yhteyteen.Nämä periaatteet ovat seuraavat: 1) yritysjohdon kontrollin laadun varmistaminen ja laadukkaat laskentatoimen ja riippumattoman tilintarkastuksen standardit rahoituslaitoksissa, jotka haluavat pankkitoimiluvan 2) markkinakurin edellyttämän konkreettisen informaation julkistaminen yksittäisten pankkien riskinotosta; informaatioon on sisällyttävä pankkien koko toimintaa koskevat value-at-risk -laskelmat 3) pankkien johdon ja hallinnon pitäminen vastuullisina pankkien liiketoiminnan asiaankuuluvasta varovaisuudesta; tähän kuuluvat rangaistukset ja taloudellinen vastuu virheellisistä tiedoista 4) veronmaksajien varojen vaarantamisen välttäminen antamalla ymmärtää, että mikään pankki ei ole liian iso kaatumaan, ja keskittämällä valvontaviranomaisten toimet sen varmistamiseen, että ne voivat puuttua asioihin ja estää koko rahoitusjärjestelmän kannalta haitalliset seuraukset yksittäisen pankin joutuessa vaikeuksiin. Näillä keinoin voidaan merkittävästi vähentää pankkivalvontaan liittyvää moraalikatoa ja valvonnan kustannuksia. Asiasanat: rahoitusmarkkinoiden valvonta, markkinakuri, järjestelmän vakaus
  • Jokivuolle, Esa; Peura, Samu (2000)
    Suomen Pankin keskustelualoitteita 2/2000
    We present a model of risky debt in which collateral value is correlated with the possibility of default.The model is then used to study: 1) the expected amount of debt recovered in the event of default as a function of collateral; and 2) the amount of collateral needed to mitigate the riskiness of a loan to a desired degree.The results obtained could prove useful for estimating recovery rates required by many popular models of credit risk and for determining collateral haircuts in debt transactions.The analysis also generates testable predictions of the behaviour of historical recovery rates of risky debt when collateral is involved.Regulators might benefit from the analysis in developing capital adequacy requirements and reviewing banks' lending standards relative to current collateral values.
  • Tarkka, Juha (1997)
    Suomen Pankin keskustelualoitteita 15/1997
    This paper analyses the prerequisites for and the results of unanimous monetary policy decisions in a monetary union consisting of heterogeneous members.The analysis is based on a multicountry version of Rogoff's model of the determination of monetary policy in the presence of supply shocks.It is shown that an international transfer system can be designed which creates consensus both on the average rate of inflation and the common response to asymmetric shocks to the participating economies.We conjecture that this kind of transfer mechanisms, institutionalized or informal, supporting joint decisions tend to evolve in contexts where there is strong aversion of disagreement.Monetary policy is arguably such a context, because frequent disagreement within the decision-making body could be harmful to credibility. The transfer system capable of supporting consensus on monetary policy can be based on activity-related, automatic subsidies for countries which would individually prefer lower inflation rates, and activity-related taxes for countries which would prefer higher inflation in absence of the transfer system. It turns out that the common monetary policy created by unanimous decisions under the supporting transfer mechanism can be characterized as a weighted average of the national "stand-alone" inflation rates, i.e. the rates which would prevail without the monetary union.The weights of the countries are not related to the sizes of the national economies, but rather to the national attitudes towards inflation and transfer income.Countries with a low stand-alone rate of inflation get a large weight in the determination of the common monetary policy, as do the countries which have a relatively low marginal valuation of international transfer income. Keywords: Positive inflation theory, monetary union, monetary policy
  • Holm, Pasi; Honkapohja, Seppo; Koskela, Erkki (1990)
    Bank of Finland Research Discussion Papers 24/1990
    The paper formulates a model of wage determination in accordance with the notion of a monopoly union determining wages after which the firm decides on employment. The novelty is to incorporate investment and capital decisions by firms. In the theoretical part the subgame-perfect Nash equilibrium and its comparative statics for wages, capital stock and employment are characterized in various cases.
  • Crowley, Patrick M.; Schultz, Aaron (2010)
    Bank of Finland Research Discussion Papers 16/2010
    Convergence and synchronisation of business and growth cycles are important issues in the efficient formulation of euro area economic policies, and in particular European Central Bank (ECB) monetary policy. Although several studies in the economics literature address the issue of synchronicity of growth within the euro area, this is the first to address the issue using cross recurrence analysis. The main findings are that member state growth rates had largely converged before the introduction of the euro, but there is a wide degree of different synchronisation behaviours which appear to be non-linear in nature. Many of the euro area member states display what is termed here intermittency in synchronization, although this is not consistent across countries or members of the euro area. These differences in synchronization behaviors could introduce further challenges in managing the country-specific effects of the common monetary policy in the euro area. Keywords: Euro area, business cycles, growth cycles, recurrence plots, nonstationarity, complex systems, surrogate analysis. JEL classification numbers: C65, E32, F15 Note: A previous shortened version of the second part of this paper was previously published as Crowley (2008).
  • Nyberg, Peter; Vaihekoski, Mika (2009)
    Bank of Finland Research Discussion Papers 21/2009
    This paper presents a new monthly value-weighted, all-share total return index for the Finnish stock market. The index covers the period from the establishment of the Helsinki Stock Exchange in October 1912 to the beginning of 1970, after which the WI index by Berglund et al (1983) and later in December 1990, the Exchange s own HEX index are available. When combined, these can be used to study the development of the Finnish equity market without a break from the beginning of the stock market until the present day. We also provide a detailed description of the construction methodology and a comparison between our index and those available earlier. The new index replaces the Unitas price index, which has been the only index available for long-term studies from 1928 onwards. The new index also provides an alternative to the book equity weighted Poutvaara (1996) price index for the period 1912 1929.
  • Virén, Matti (1990)
    Bank of Finland Research Discussion Papers 19/1990
    This note presents new evidence on Finnish property criminality. The analysis is based on Earlichls (1973) model; the empirical an~lysis makes use af annual Finnish data for the period 1951 - 1986. The estimation results strongly support the notion that both the appreh~nsion rate and the severity of punishment have a strong deterrence effect on larcenies and robberies.
  • Virén, Matti (1989)
    Bank of Finland Research Discussion Papers 2/1989
    This paper presents some analyses of interest rate determination in six industrialized countries during the Great Depression. The main finding of the paper is that the huge real interest rate shocks experienced during that time were mainly due to policy actions by central banks.
  • Mehrotra, Aaron (2007)
    Bank of Finland Research Discussion Papers 2/2007
    We examine developments in national contributions to euro area M3 for a sample of nine euro area countries during 1999-2005.We investigate the co-movements of national contributions with euro area M3 and discuss possible reasons for divergencies in growth rates of national contributions.Finally, we evaluate the information content of national contributions to M3 using formal tests of causality between monetary aggregates, consumer prices and equity prices. Key words: national contribution, M3, euro area JEL classification numbers: E51, E31
  • Kilponen, Juha (2003)
    Suomen Pankin keskustelualoitteita 18/2003
    This paper applies the robust control approach to a simple positive theory of monetary policy, when the central bank's model of the economy is subject to misspecifications.It is shown that a central bank should react more aggressively to supply shocks when the model misspecifications grow larger.Moreover, the model misspecifications aggravate the inflation bias and a trade-off between output stabilisation and inflation worsens when the uncertainty surrounding the central bank's model increases.This implies that the larger the model misspecifications are, the more inflation-averse the central bank should be. Key words: risk-sensitivity, robust control theory, monetary policy, Brainard conservatism, model uncertainty JEL classification numbers: E58
  • Kortela, Tomi (2016)
    Bank of Finland Research Discussion Papers 19/2016
    Typically a constant – or zero – lower bound for interest rates is applied in shadow rate term structure models. However, euro area yield curve data suggest that a time-varying lower bound might be appropriate for the euro area. I show that this indeed is the case, i.e. a shadow rate model with time-varying lower bound outperforms the constant lower bound model in euro area data. I argue that the time-variation in the lower bound is related to the deposit facility rate and, thus, to monetary policy. This time-variation in the lower bound gives a new channel via which monetary policy may affect the yield curve in a shadow rate model. I show that the intensity of this channel depends on how tightly the lower bound restricts the yield curve, and I argue that this channel has recently become important for the euro area.