Matti Viren

The Okun curve is non-linear

Abstract This paper presents cross-country evidence on a non-linear Okun curve. The analysis is based on a simple error–correction model of unemployment. The model is estimated using a threshold model estimator. Evidence from 20 OECD countries for the period 1960–1997 provides support for the existence of non-linearities in terms of the output growth effects. Output growth has a strong effect on unemployment when unemployment is low and output is high, and vice versa. Thus, in bad times, the effect of output growth on unemployment can be close to zero.

Financial Conditions Indexes

This paper provides an exposition of the nature, means of estimation and uses of Financial Conditions Indexes (FCIs) and their relationship to the more common Monetary Conditions Indexes (MCIs) that are used by market analysts, international organisations and central banks. Using panel datasets for Western Europe we explore how asset prices, particularly house and stock prices, can provide useful additional indicators of future changes in output and inflation. We find a clear role for house prices but a poorly determined relationship for stock prices. Unfortunately the most useful role for FCIs comes from their incorporation of high frequency data and the opportunity this gives for extracting information about changes in market expectations for inflation and output. This helps market participants make judgements about likely central bank reactions and helps central banks assess the stance of policy between forecasts. While stock prices are high frequency, house prices are not. At quarterly frequency central banks in particular will want to use traditional economic forecasting methods and summary indicators like FCIs will have only a limited role. We illustrate how such an FCI can be used, drawing on monthly data for Finland.

The exchange rate and monetary conditions in the Euro area

The Exchange Rate and Monetary Conditions in the Euro Area. — Using information from a variety of sources, this paper suggests that the exchange rate will play an important role in the transmission of the impact of monetary policy on the real economy and inflation in the euro area. As a first approximation it would be reasonable to assume that an increase in the real 90-day interest rate of 100 basis points would have the same effect on demand two years later as a 3.5 percent fall in the real euro exchange rate. This implies that the euro area will tend to behave like a large open economy rather than a closed economy and hence that it would be helpful in informing monetary policy to construct a Monetary Conditions Index (MCI).ZusammenfassungDer Wechselkurs und monetÄre Bedingungen im EuroRaum. — Der Verfasser benutzt Informationen aus einer Reihe von Quellen und kommt zu dem Ergebnis, dass der Wechselkurs bei der übertragung der geldpolitischen Impulse auf die reale Wirtschaft und Inflation im Euro-Raum eine bedeutende Rolle spielen wird. In erster AnnÄherung hÄlt er es für annehmbar zu vermuten, dass ein Anstieg des 90-Tage-Zinssatzes um 100 Basispunkte dieselbe Wirkung auf die Nachfrage in zwei Jahren haben dürfte wie ein 3,5-prozentiger Rückgang des Euro-Wechselkurses. Das deutet darauf hin, dass der Euro-Raum dahin tendiert, sich wie eine gro\e offene Volkswirtschaft und nicht wie eine geschlossene Volkswirtschaft zu verhalten, und dass es somit zur Information der geldpolitischen Instanzen hilfreich wÄre, einen Index der monetÄren Bedingungen (Monetary Conditions Index = MCI) zu entwickeln.

Efficiency and Costs of Payments: Some New Evidence from Finland

This paper deals with optimal payment systems. The issue boils down to how large are the costs of different payment media, which can be interpreted as a question of the efficiency of the means of payment. However, there are other qualifications related to the choice of payment media. Here, at least three issues can be distinguished. First is the question of optimal payment medium for each individual payment (size, location, EFTPOS etc.). This choice is not independent of the individual characteristics of the payer and payee. Secondly, there is the question of cost effectiveness of payments for different institutions and sectors. The final issue concerns the social optimum for each payment medium. These issues have been particularly controversial in the case of cash, which is still the dominant payment medium in most euro countries. Part of the controversy arises from the fact that the costs and benefits of different payment media affect different market participants in quite different ways, so that a possible social optimum might not correspond eg to the optima for different firms. The paper contains a short review of calculation methods and empirical results for a sample of countries. It also provides new evidence from Finland, which is to an extent one of the front-runners in payment technology and institutional design in payment systems. This shows up in relatively low overall costs of payments. Our estimate of total costs of payment media is 0.3 per cent of GDP, which is very low by international standards.

Testing the “natural rate of suicide” hypothesis

This paper analyses the economic determinants of suicide. More specifically, we test the hypothesis that suicide is related to shocks or news concerning income growth. Testing is based on an error correction model of suicide in which the long‐run part takes into account various demographic and structural variables. Empirical analysis is based on Finnish time series data covering the period 1878‐1994. Some cross‐country data are also used. The empirical results strongly support the “natural rate” hypothesis.

Government Size and Output Volatility: Is There a Relationship?

This paper provides some further tests for the proposition that a larger public sector leads to smaller output volatility. Both Gali and Fatas & Mihov have provided some evidence which appears to support this proposition. Their evidence is, however, based on a relatively small sample of countries. In this study, we go beyond the OECD sample and focus on a much larger World Bank data set covering up to 208 countries for the period 1960-2002.We also seek to utilise some time series aspects of the material by using pooled cross-section time series data. Tests with different models and measures clearly indicate that the original results are not very robust and the relationship between government size and output volatility is either nonexistent or very weak at best. Key words: government, fiscal policy, automatic stabilisers JEL classification numbers: E62, H30, E32

Inflation, Capital Markets and Household Saving in the Nordic Countries

Household saving ratios in the Nordic countries are very low by international standards and have declined markedly during the 1980s. Aggregate quarterly time-series data for the period 1970-89 are used to study the development of household saving behavior over time. The evidence suggests that the household saving ratio responds positively to both the inflation rate and real income growth. There is also some weak evidence to support the view that the rate of change in real housing prices has a negative effect on household saving ratios. Copyright 1992 by The editors of the Scandinavian Journal of Economics.

Sensitivity of Fiscal-Policy Effects to Policy Coordination and Business Cycle Conditions

This paper deals with the problems of assessing the effects of fiscal policy in the European Monetary Union. Here, we face wide cross-country differences in key fiscal parameters, some of which may also be vary over time (business cycle). Moreover, these effects may also depend on trade spillover effects and thus on the extent of policy coordination. Our empirical analyses make use of data for 15 EU countries, mainly for the period 1970-2011. The results clearly indicate that fiscal multipliers are not constant across countries and time, being much larger during economic recessions. By contrast, the policy coordination-effects appear to be more homogenous, although it turns out that small countries may benefit more from coordination.

Pressures on the Stability and Growth Pact from asymmetry in policy

We identify pressures on the SGP that stem from asymmetries in economic behaviour and macroeconomic policy in the euro area. The asymmetry in the way the euro economy operates with respect to inflation, growth and unemployment merits an asymmetric policy response. While Eurosystem monetary policy appears to match the concerns, the asymmetry of fiscal policy in the member states means that they tend to develop their stance in a way that is inconsistent with a long-run sustainable balance and debt ratio. This could be because they are persistently too optimistic about growth, thus generating pressure on the deficit limit which they then blame on cyclical causes. However, the main asymmetry is a failure to adjust sufficiently in the up phase of the cycle, either by cutting taxes less or controlling expenditures to offset the unwillingness to raise taxes and control expenditures in the down phase. The asymmetry in the SGP through the excessive deficit procedure helps to offset this political problem.

Suicide and business cycles: Finnish evidence

The relationship between suicide and business cycles is analysed using long Finnish time series for the period 1878-1994. The results clearly show that suicide increases along with age and is related to both GDP growth (inversely), bankruptcies and unemployment.