Private Indebtedness and the Banking Crisis in Finland

In Finland the private sector borrowing started to rise rapidly in conjunction with the liberalization of capital movements and deregulation of the domestic financial sector during the second half of the 1980s. The financial deregulation coincided with and amplified an economic boom marked by favourable income expectations, loose fiscal policy associated with improved terms of trade and anticipated reduction in income tax rates. All these factors contributed to the overheating of the Finnish economy that finally turned into a severe recession in the beginning of 1990s. The reaction of households to financial deregulation in Finland was similar to that in the other Nordic countries. As in Norway and Sweden, household indebtedness started to rise in the mid-1980s, after the abolishment of lending rate regulations and prior savings requirements for housing loans. Measured by the ratio of household debt to annual disposable income, household indebtedness peaked in 1990 at more than 80 per cent of annual disposable income. Since then, it has fallen slightly. Debt financing in the corporate sector started to increase rapidly in conjunction with the liberalization of capital movements, which enabled firms also in the domestic sector to raise loans in foreign currencies. During the 1980s debt financing grew most in the real estate business, construction and services. Despite increased borrowing, the debt with respect to equity of Finnish firms did not rise significantly until 1990–91, because a large part of the debt growth was matched by increases in corporate earnings and equity values during the late 1980s. Recession turned the situation for the worse as corporate earnings and the market value of assets plummeted. High indebtedness and overcapacity especially in the domestic sector will require several years of adjusting.banking crisis; indebtedness

Indicators of the Cyclically Adjusted Budget Balance: The Bank of Finland's Experience

Cyclically adjusted government budget balances have become increasingly popular as a means of analysing the fiscal situation and changes in policy that result from the intentional actions of the government. As the actual budget balances are affected both by cyclical factors ('automatic stabilisers') and structural ('discretionary') measures, they may not, in general, be very useful when seeking to assess the orientation of underlying fiscal policy and possible structural imbalances in the budget balance. The problem however is that there is no generally accepted method of calculating cyclically adjusted (structural) budget balances. The results tend to be fairly noisy and sensitive to the method of calculation. The purpose of this article is to highlight these issues by reviewing three estimation methods used by the Bank of Finland - GDP smoothing based on the Hodrick-Prescott trend estimation method, the production function approach and Blanchard's method - and the corresponding estimates of the cyclically adjusted budget balances for Finland.fiscal policy; cyclically adjusted budget balance

Current Income and Private Consumption-Saving Decisions: Testing the Finite Horizon Model

This paper considers the effects of fiscal policy on private consumption in a framework that encompasses both the conventional (Keynesian) view of fiscal policy and the Ricardian debt neutrality hypothesis. The model is built on Blanchard's stochastic model of intertemporal optimization with finitely lived consumers. As an extension to the basic framework public consumption is explicitly incorporated in the model. The model nests also the excess sensitivity hypothesis whereby the role of current income on consumption can be investigated. Empirical analyses are based on annual data from ten EU countries covering the years 1961–1994 and use the nonlinear instrumental variable GMM estimator both in country-specific and panel estimations. The tests reject clearly the Ricardian debt neutrality for majority of the countries in the sample. Moreover, deviations from Ricardian neutrality seem to arise from excess sensitivity of consumption to current income rather than from a finite planning horizon on the part of consumers. The results also suggest that in the consumers' utility functions, government consumption and private consumption tend to be unrelated or complements rather than substitutes.private consumption; private saving; current income; fiscal policy; planning horizon

Fiscal policy: Coordination, discipline and stabilisation

The framework for fiscal policy coordination in EMU has been in effect for three years. The experience gained shows that the rule-based approach provides in principle a feasible solution for policy coordination among a large number of heterogeneous countries whose joint interest is to safeguard the credibility of the common monetary policy and smooth functioning of the EMU. At the same time, the experience indicates that the current set of rules and procedures laid down in the Maastricht Treaty and Stability and Growth Pact (SGP) suffer from complexity, lack of transparency and asymmetric incentives. The paper discusses the rationale for fiscal policy coordination in the monetary union in general and emphasises the role of fiscal rules and multilateral surveillance in ensuring discipline and long-term sustainability of public finances. The paper also considers incentive problems arising from the asymmetric nature of the SGP and weak interaction between national policy-making and EU-level policy commitments. As a possible remedy, the paper proposes complementing the SGP with medium-term expenditure rules for central governments and balanced budget requirements for lower levels of government.fiscal policy coordination; expenditure rules; Stability and Growth Pact

Fiscal Policy and Private Consumption – Saving Decisions: Evidence from Finland

The paper presents a theoretical model of private consumption that emcompasses both the conventional (Keynesian) view of fiscal policy and the Ricardian debt neutrality hypothesis. The effects of fiscal policy on private consumption are analyzed in an extended framework built on Blanchard's stochastic model of intertemporal optimization with finitely lived consumers, in which private consumption depends on expected lifetime wealth. The model also nests various hypotheses concerning the relationship between public spending and private consumption. Empirical analysis is based on the Finnish annual data from 1960–1995 and uses the nonlinear instrumental variable GMM estimator. The tests cannot reject the hypothesis that consumers are Ricardian. Moreover, the results suggest that in the consumers' utility functions, government consumption is a substitute for private consumption.private consumption; private saving; fiscal policy; planning horizon

Fiscal Policy and Private Consumption-Saving Decisions: Evidence from Nine EU Countries

This paper considers the effects of fiscal policy on private consumption in a framework that encompasses both the conventional (Keynesian) view of fiscal policy and the Ricardian debt neutrality hypothesis. The model is built on Blanchard's stochastic model of intertemporal optimization with finitely lived consumers. As an extension to the basic framework, the model also nests various hypotheses concerning the relationship between public spending and private consumption. Empirical analyses are based on annual data from nine EU countries covering the years 1961–1994 and use the nonlinear instrumental variable GMM estimator both in country-specific and in panel estimations. The tests cannot reject the hypothesis that consumers are Ricardian except for one country. Moreover, the results suggest that in the consumers' utility functions, government consumption tends to be a complement rather than a substitute for private consumption.private consumption; private saving; fiscal policy; planning horizon

Jatkuvan oppimisen aika

Kesälomilta palattuani selailin vanhoja kirjoituksiani Tieteessä tapahtuu -lehdessä. Kaksi juttua vaikutti yllättävän ajankohtaisilta. Kirjoitin helmikuussa 2014 kolumnin digitalisaation ja robotisaation vallankumouksesta. Sen voisi melkeinpä julkaista uudelleen, mutta keinoälyn merkitys tulisi nostaa aiempaa selvemmin esille teknologisessa vallankumouksessa

Cyclical stabilisation under the Stability and Growth Pact: How effective are automatic stabilisers?

It is widely recognised that fiscal policy will have greater responsibilities for cyclical stabilisation in the EMU, given the loss of the monetary instrument at national level. At the same time, the EMU’s budgetary framework emphasises the need to rely on automatic fiscal stabilisers, rather than active policies, in cushioning the business cycle. We show that automatic stabilisers are relatively powerful in the event of a shock to private consumption, but less so as regards shocks to private investment and exports. In respect of supply side shocks, automatic stabilisers are largely ineffective, which may in fact be a good thing to the extent that supply-side disturbances call for structural adjustment rather than cyclical stabilisation. Looking ahead, one of the challenges facing policy-makers will be how to design tax and welfare reforms which, while improving incentives and market functioning, do not stifle – and in fact could strengthen – the impact of automatic stabilisers.cyclical stabilisation; automatic stabilisers; Stability and Growth Pact