Mikael Juselius’ doctoral dissertation covers a range of significant issues in modern macroeconomics by empirically testing a number of important theoretical hypotheses. The first essay presents indirect evidence within the framework of the cointegrated VAR model on the elasticity of substitution between capital and labor by using Finnish manufacturing data. Instead of estimating the elasticity of substitution by using the first order conditions, he develops a new approach that utilizes a CES production function in a model with a 3-stage decision process: investment in the long run, wage bargaining in the medium run and price and employment decisions in the short run. He estimates the elasticity of substitution to be below one. The second essay tests the restrictions implied by the core equations of the New Keynesian Model (NKM) in a vector autoregressive model (VAR) by using both Euro area and U.S. data. Both the new Keynesian Phillips curve and the aggregate demand curve are estimated and tested. The restrictions implied by the core equations of the NKM are rejected on both U.S. and Euro area data. These results are important for further research. The third essay is methodologically similar to essay 2, but it concentrates on Finnish macro data by adopting a theoretical framework of an open economy. Juselius’ results suggests that the open economy NKM framework is too stylized to provide an adequate explanation for Finnish inflation. The final essay provides a macroeconometric model of Finnish inflation and associated explanatory variables and it estimates the relative importance of different inflation theories. His main finding is that Finnish inflation is primarily determined by excess demand in the product market and by changes in the long-term interest rate. This study is part of the research agenda carried out by the Research Unit of Economic Structure and Growth (RUESG). The aim of RUESG it to conduct theoretical and empirical research with respect to important issues in industrial economics, real option theory, game theory, organization theory, theory of financial systems as well as to study problems in labor markets, macroeconomics, natural resources, taxation and time series econometrics. RUESG was established at the beginning of 1995 and is one of the National Centers of Excellence in research selected by the Academy of Finland. It is financed jointly by the Academy of Finland, the University of Helsinki, the Yrjö Jahnsson Foundation, Bank of Finland and the Nokia Group. This support is gratefully acknowledged.

Unit labor costs have been a widely discussed topic in Finland as well as all around the world. Technically unit labor costs are calculated by a simple ratio of labor costs and output. There is a large divergency of opinion about how consistent measurement unit labor costs are for competitiveness of an economy or an industry, for example. There is no unambiguous answer how to measure cost competitiveness of a country or an industry and one should keep in mind what the unit labor costs do not measure. Also, it is two different cases to observe nominal or real unit labor costs. In the former denominator is in units of measurements, like meters or units, and in the latter is deflated by current prices. Also there is a difference in observation of development within the firms versus on the aggregate level. In the thesis the unit labor costs of Finnish industrial production are calculated from the firm specific micro data. Also, the part of the structural change and development within firms by decompositions is estimated based on microdata. Furthermore, markup of the firms is estimated by comparing price development to marginal costs of the firms, to this end there are estimated an industry specific production function, by using some micro econometric methods like fixed effects – regression. According to the results obtained the unit labor costs have increased by about two per cents in annual growth rates between 2007 and 2016. There has been lot of fluctuation in the development, especially in the beginning of the observation period. The unit labor costs increased a lot because of drop of the production caused by recession. During the following two years they decreased a little bit. After that the development has been steadier. The decomposition into the structural and within firms effect tells that the major part of the fluctuation were driven by the changes within the firms, when the structural effect was the driver of the moderate but steady increase and being actually more remarkable explainer of the annual growth rates. The markup within industrial firms decreased a little bit during the observation period. Although, should be pointed out that there is some uncertainty in production function estimates and firm specific prices and consequently markup estimates are suggestive.