Juha Tarkka

The Market for Electronic Cash Cards

We develop a theoretical framework aimed to model the pricing of electronic cash cards and the market domain in which these cards will be used in an environment where charge cards and currency (the legal tender) are competing payment media. We also investigate whether the adoption of the various payment media generates an underutilization or overutilization of the electronic cash cards relative to currency.

Monetary policy in the BOF3 quarterly model of the Finnish economy

Abstract This paper describes the modelling of monetary policy in BOF3, a quarterly econometric model of Finland built at the Research Department of the Bank of Finland. BOF3 is a 198-equation, ‘amended Keynesian’ model which is used regularly in policy analysis and forecasting at the Bank. The modelling of the Finnish monetary sector has been complicated by the fact that most interest rates applied by the banks have so far been institutionally regulated. In spite of this, model builders have attempted to follow the conventional IS-LM approach as closely as possible, assuming that interest rates equilibrate financial markets outside the banking sector. The reported simulation experiments describe the effects of a change in nomical interest rates, of a change in the domestic money supply, and of a fiscal stimulus with and without monetary accomodation.

The Role of Capital Flows in the Adjustment of Money Demand: The Case of Finland

The paper models the dual role of money balances as a short-run buffer stock and an asset with a well-specified long-run demand function. The analysis is carried out in an open economy framework. Consequently, there will be an offset to monetary policy in the form of induced capital movements, but in our model, it will be distributed over time even under perfect substitutability of financial claims. Estimates for the parameters of the demand for money function are obtained from a capital flow equation using both unrestricted (OLS) and restricted (nonlinear) estimation methods. The results provide strong evidence in favour of the shock-absorption theory for the adjustment of money demand under money supply changes.

The future of financial markets

List of Tables List of Figures Preface Acknowledgements Introduction The Payment System: Structure, Efficiency, Innovation and Regulation Technical Efficiency in Stock Markets Securities Settlement Systems E-Money: An Addendum References Index

Population shocks and employment: Testing the labor market equilibrium hypothesis

Abstract This note tests the labor market equilibrium hypothesis by examining the speed of adjusment of employment with respect to population shocks. The analyses in the time domain with annual cross-country data from 15 OECD countries - and the accompanying preliminary analyses in the frequency domain - are clearly at variance with the equilibrium hypothesis.

Technical Efficiency in Stock Markets

Much of our understanding of the way stock exchanges may develop will depend on empirical evidence on their structures and how they have been evolving over recent years. If we can see that there are strong economies of scale, for example, then we can expect that the larger stock exchanges will either drive the smaller out of business as barriers between them fall or that the smaller exchanges will merge so that they can compete successfully with their larger counterparts. Similarly we might expect that if there is a wide range of efficiency among exchanges that persists over time despite the reduction in barriers then it will be possible for a variety of exchanges to remain in business as other sources of competitive advantage clearly exist. In this and the subsequent chapter we explore the efficiency of stock exchanges, considering both their cost and revenue structures. We employ two main approaches: stochastic frontier analysis, which assumes that it is possible to parameterise the productive behaviour in the industry and data envelopment which is nonparametric. They each have their disadvantages.

The Payment System: Structure, Efficiency, Innovation and Regulation

It is easy to under-estimate the importance of the payment system and its contribution to the economy because it is largely out of sight. In some countries the costs of the payment system can amount to 3 per cent of GDP (Humphrey et al., 1997, p. 33). The costs of making payments can differ across countries by an order of ten, which could have a major impact on the development of the financial system and the ability to respond rapidly to new challenges and opportunities. This is particularly true for the exploitation of cross-border transactions in the EU. These issues could readily merit a book on their own. However, these aspects of financial ‘plumbing’ tend to be regarded as dull compared with banking and monetary policy. In this chapter, after a short introduction summarising the nature of the payment system and its structure, we consider just three main issues that affect the likely future development of the system: its efficiency in various countries round the world and the scope for improvement by moving to best practice; the nature of innovation in the industry and the potential for new more efficient systems both within and between countries; the role of regulators in shaping the future.

Securities Settlement Systems

In the chapter on payment systems, the issue of settlement – the final completion of the transaction to the satisfaction of the parties concerned – was largely deferred, because it is a much more substantive issue in the context of securities transactions. In the case of unidirectional payments, only one transaction has to be completed. However, in the case of securities, the security has to be ‘delivered’ to the purchaser in return for the payment.1 This creates two complications, first the matching of the two legs of the transaction and second that an additional system is required that holds and allocates titles to the securities. The first complication also exists where one payment is made in return for another as for example in currency transactions. The key issue here, however, is that several further layers are required in the transaction process.

E-Money: An Addendum

An area where forecasts made 25 years ago, before European financial integration was firmly on the agenda, are rather surprisingly astray, is e-money. With the rapidly rising use of credit cards at the time and the replacement of paper-based giro by ATMs, in Finland at least (see Chapter 2 on payments), one would have expected that notes and coins would be steadily replaced by electronic cards (purses – see Box for a definition) for low value transactions.1 Trial schemes were already being undertaken and the technology for reliable transactions exists and is in use. As it is, although notes and coins in circulation have fallen substantially in most countries compared to nominal income, this is more a result of the rise in the use of credit and debit cards for larger value transactions and the development of secure interest bearing highly liquid alternatives for cash balances.