Tuomas Malinen

Does income inequality contribute to credit cycles

Recent literature has presented arguments linking income inequality on the financial crash of 2007 - 2009. One proposed channel is expected to work through bank credit. We analyze the relationship between income inequality and bank credit in panel cointegration framework, and find that they have a long-run dependency relationship. Results show that income inequality has contributed to the increase of bank credit in developed economies after the Second World War.

Nonlinearity and Cross-Country Dependence of Income Inequality

We use top income data and the newly developed regime switching Gaussian mixture vector autoregressive model to explain the dynamics of income inequality in developed economies during the last 100 years. Our results indicate that the process of income inequality consists of two equilibriums identifiable by high inequality, high variance and low inequality, low variance. Our results also show that income inequality in the US is the driver of changes in income inequality in other developed economies.

How to Leave the Eurozone: The Case of Finland

This article provides thoughts and guidelines on how a country could exit from the Economic and Monetary Union (EMU) and its currency the euro. We take the hypothetical exit of Finland as a concrete example. Although there is a way out of the euro for Finland and other member countries, exit would not be easy, nor would its short-term costs be known beforehand with any clear margin. We find the lack of a domestic payments system and uncertainty concerning the redenomination costs to be the biggest risks associated with the cost of Finland’s exit. Still, the costs of Finland’s exit need not be very large, around 10 billion euros in the best-case scenario, but we also acknowledge a very costly scenario for the exit. Any member country considering exit from the euro should weigh the short-term costs of an exit against the possible long-run benefits of having a domestic currency.

How to Abandon the Common Currency in Exchange for a New National Currency

The question how to leave a currency union has become an important economic issue during last few years. Asymmetric shocks, low growth and increasing federalism have left several countries of the Eurozone more open to considering whether the economic and political costs associated with euro membership have become too high. Having an individual currency can produce benefits to a country compared to a common currency of a monetary union, particularly if the single monetary policy proves unsuitable for the macroeconomic development of the country in question. However, uncertainty relating to the costs of an exit can discourage political leaders from taking decisive steps towards an exit. This article provides thoughts on how an exit from a modern currency union can be managed. We will show that the costs related to the exit can be controlled, but also that the process includes many uncertainties that the exiting country needs to be prepared for since they cannot be reduced.

The Risk of Financial Crises: Does it Involve Real or Financial Factors?

The recent financial crisis appears to point to credit booms as the most important driver of crises. However, could macroeconomic factors such as income inequality potentially be the real root cause of financial crises? We explore a broad variety of financial and macroeconomic variables and employ a general-to-specific model selection process to find the most reliable predictors of financial crises in 14 developed countries over a period of more than 100 years. Our in-sample results indicate that income inequality has predictive power in addition to and above loan growth and several other financial variables. Out-of-sample forecasts for individual predictors in different time periods show that their predictive power tends to vary considerably over time, but income inequality yields individual predictive power in each forecasting period.