Inflation Targeting and the Role of Money in a Model with Sticky Prices and Sticky Money

In order to study the role of money in an inflation targeting regime for monetary policy, we compare the interest rate and money as monetary policy instruments. Our dynamic stochastic general equilibrium model combines the money-in-the utility-function approach with sticky prices. We allow for time-varying preferences for real money balances, ie velocity shocks, and stochastic aggregate costs in production, ie 'technology shocks'. We show that conditioning the interest rate on the expected future cost change can be used to achieve constant inflation or constant inflation expectations. The assumed adjustment costs in 'money demand' lead to an equilibrium in which inflation can be controlled by money growth without information on the current state of the economy. Finally, we discuss the tradeoff between money and the interest rate as a monetary policy instrument. The result depends on the parameter stability of the cost change process relative to that of the 'money demand' function.monetary transmission mechanism; money-in-the-utility-function model; sticky prices; technology shock; monetary policy strategy

Stability of the Demand for M1 and Harmonized M3 in Finland

We derive a theoretical model for the demand for money using the money-in-the-utility-function approach. The steady-state – utility function – parameters of the model of narrow money (M1) estimated with cointegration techniques are stable over the foreign exchange rate regime shift; whereas in the model of harmonized M3 (M3H) they are not stable. The theoretical model fits the M1 data. The adjustment cost parameters of the M1 model describing the dynamics of the demand for money are stable over the sample period. The adjustment cost parameters of the M3H model are not stable. These results suggest that from the Finnish point of view M1 would be a more appropriate intermediate target for monetary policy than harmonized M3.money-in-the-utility-function model; structural breaks; demand for money; narrow money; harmonized M3

On the Estimation of Euler Equations in the Presence of a Potential Regime Shift

The concept of a peso problem is formalized in terms of a linear Euler equation and a nonlinear marginal model describing the dynamics of the exogenous driving process. It is shown that, using a threshold autoregressive model as a marginal model, it is possible to produce time-varying peso premia. A Monte Carlo method and a method based on the numerical solution of integral equations are considered as tools for computing conditional future expectations in the marginal model. A Monte Carlo study illustrates the poor performance of the generalized method of moment (GMM) estimator in small and even relatively large samples. The poor performance is particularly acute in the presence of a peso problem but is also serious in the simple linear case.peso problem; Euler equations; GMM; threshold autoregressive models

Declining labour share – Evidence of a change in underlying production technology?

The study demonstrates that the decline in the labour share in Finland can not be explained by the Cobb-Douglas production function. Instead, we propose an approach based on the constant-elasticity-of-substitution (CES) production function with labour- and capital-augmenting technical progress. The model is augmented by imperfect competition in the output market. According to the empirical results based on estimation of the first-order-conditions, the technical elasticity of substitution is significantly less than unity (0.6) and hence the Cobb-Douglas production function is rejected. The growth rate of the estimated labour-augmenting technical progress has decreased in recent years, which is not consistent with the ‘new-economy’ hypothesis. Capital-augmenting technical trend has exploded during the same period, which provides a possible explanation for the rapid growth of the Solow residual. The main contributing factor behind the declining labour share is, however, the increasing mark-up.production function; elasticity of technical substitution; input-augmenting technical progress; new economy

Labour and product market competition in a small open economy, Simulation results using a DGE model of the Finnish economy

Using the DGE model of the Finnish Economy (the ‘Aino’ model), we study the response of the economy to reforms in both labour and product markets. The reforms are two-fold. We assume that the wage mark-up, ie the monopoly power of wage-setters is gradually reduced by 5 percentage points. At the same time, the degree of competition is increased, ie price margins are exogenously reduced by 2 percentage points. These reforms imply a very favourable outcome of the economy. Both consumption and employment in-creases permanently and the reforms are welfare enhancing. Public balances improve giving room for 1.5 percentage point cut in income taxes. Our simulation exercises clearly demonstrate that such reforms may help in financing the future fiscal burden of an ageing population.competition; dynamic general equilibrium; public finance

Demographic Uncertainty and Labour Market Imperfections in Small Open Economy

This paper extends Gertler's (1999) tractable overlapping generations model by allowing for imperfect labour markets and distortionary taxation. Furthermore, we allow for stochastic variation in demographic structure. The model is then used to study demographic change in a small open economy of Finland. The simulations highlight a key role played by labour market imperfections in determining a fiscal burden of ageing in defined benefit pensions systems. Higher labour market imperfections lead into considerably stronger responses of labour supply and taxes on ageing. Thus, imperfections magnify the problem associated with fiscal sustainability in ageing society. Higher labour market imperfections lead into considerably stronger responses of labour supply and taxes on ageing. Thus, imperfections magnify the problem associated with fiscal sustainability in ageing society. Stochastic simulations suggest that lengthening of working time has rather minor impact on alleviating the fiscal burden of ageing. Only a small fraction of the stochastic variation in endogenously determined contribution rate is explained by the stochastic variation in the lenght of working time. Variation in fertility rate is clearly more important.Demographics, Uncertainty, DSGE, Labour Markets

Population ageing in a small open economy – some policy experiments with a tractable general equilibrium model

This paper extends Gertler’s (1999) tractable overlapping generations model with life-cycle features by allowing for distortionary taxation, demographic transition and stochastic variation in demographic structure. The model is then used to study demographic change in the small open economy of Finland. Simulations highlight the key role played by labour market responses to ageing. When the responses of labour supply, wages, and hence private consumption, to higher taxation are consistently accounted for, population ageing has clearly much larger effects on public finance, when compared to mechanical sustainability calculations. Stochastic simulations suggest that lengthening of working time has only a modest alleviating effect on the fiscal burden of ageing. This is due to the fact that stochastic variation in the length of working time has only a relatively small effect on the model’s dependency ratio. Variation in life expectancy is clearly much more important.ageing; general equilibrium; public finance; demographic uncertainty

Surgically treated ovarian lesions in preadolescent girls

Introduction The purpose of this study was to investigate the epidemiology and characteristics of surgically treated ovarian lesions in preadolescent girls. Material and methods This was a retrospective cohort study including all 0- to 11-year-old girls operated at a single center from 1999 to 2016 for ovarian cysts, neoplasms or torsions. Patient charts were reviewed for symptoms, preoperative radiological imaging, operative details and histopathology. Results We identified 78 girls, resulting in a population-based incidence of 4.2/100 000. Infants (n = 44) presented with benign cysts (42/44, 95%, one bilateral), a benign neoplasm (1/44, 2%) and a torsion without other pathology (1/44, 2%). Torsion was found in 25/29 (86%) ovaries with complex cysts and in 3/15 (21%) ovaries with simple cysts in preoperative imaging (P <0.001). Most infants were symptomless. Lesions in 1- to 11-year-old girls (n = 34) included benign neoplasms (n = 21/34, 62%), malignant neoplasms (n = 5/34, 15%), a cyst with torsion (n = 1/34, 3%) and torsions without other pathology (n = 7/34, 21%). Torsion was more common in benign (17/21, 81%) than in malignant neoplasms (1/5, 20%) (P <0.020). Ovarian diameter did not differ between ovaries with or without torsion (P = 0.238) or between benign and malignant neoplasms (P = 0.293). The duration of symptoms in lesions with or without torsion was similar. Conclusions The majority of surgically treated ovarian lesions in preadolescent are benign lesions with torsion. Surgery should be ovary-preserving and performed without delay.Peer reviewe

Cointegrated Vector Autoregressive Processes with Continuous Structural Changes

We extend the conventional cointegrated VAR model to allow for general nonlinear deterministic trends. These nonlinear trends can be used to model gradual structural changes in the intercept term of the cointegrating relations. A general asymptotic theory of estimation and statistical inference is reviewed and a diagnostic test for testing the correct specification of an employed nonlinear trend is developed. The methods are applied to Finnish interest rate data. A smooth level shift of the logistic form between the own-yield of broad money and the short-term money market rate is found appropriate for these data. The level shift is motivated by the deregulation of issuing certificates of deposit and its inclusion in the model solves the puzzle of 'missing cointegration vector' found in a previous study.cointegrated VAR model; gradual structural change; nonlinear deterministic trend