Balance Sheet Interlinkages and Macro-Financial Risk Analysis in the Euro Area

The financial crisis has highlighted the need for models that can identify counterparty risk exposures and shock transmission processes at the systemic level. We use the euro area financial accounts (flow of funds) data to construct a sector-level network of bilateral balance sheet exposures and show how local shocks can propagate throughout the network and affect the balance sheets in other, even seemingly remote, parts of the financial system. We then use the contingent claims approach to extend this accounting-based network of interlinked exposures to risk-based balance sheets which are sensitive to changes in leverage and asset volatility. We conclude that the bilateral cross-sector exposures in the euro area financial system constitute important channels through which local risk exposures and balance sheet dislocations can be transmitted, with the financial intermediaries playing a key role in the processes. High financial leverage and high asset volatility are found to increase a sector’s vulnerability to shocks and contagion. JEL Classification: C22, E01, E21, E44, F36, G01, G12, G14Balance sheet contagion, contingent claims analysis, financial accounts, macro-prudential analysis, network models, systemic risk

Is wealth driving the income distribution? : An Analysis of the link between income and wealth between 1995 and 2016 in Finland

This article focuses on analysing the role of financial wealth in the generation of income and how it is reflected in the income distribution between households. Piketty believes that we are living in an era of exceptionally narrow income distribution and that due to the increase of financial as well as inherited property; we are entering an era of increasing income distribution. In this article, the same phenomenon is scrutinised but with a conceptually consistent framework in which the national balance sheets are combined with the related income flows. After this, the income flows which are missing from the national income concepts are added. Finally, the household sector income flows are separated and are linked with income distribution data, and these income flows are broken down by income deciles. The outcome of this analysis is that even though financial wealth in relation to the common wage development has almost doubled, the rates of return have almost halved. Additionally, as the part of the property income flows are received by other economic sectors than the households, the distribution of primary income, i.e. income before redistribution, of different income deciles has not changed significantly in the past twenty years.This article focuses on analysing the role of financial wealth in the generation of income and how it is reflected in the income distribution between households. Piketty believes that we are living in an era of exceptionally narrow income distribution and that due to the increase of financial as well as inherited property; we are entering an era of increasing income distribution. In this article, the same phenomenon is scrutinised but with a conceptually consistent framework in which the national balance sheets are combined with the related income flows. After this, the income flows which are missing from the national income concepts are added. Finally, the household sector income flows are separated and are linked with income distribution data, and these income flows are broken down by income deciles. The outcome of this analysis is that even though financial wealth in relation to the common wage development has almost doubled, the rates of return have almost halved. Additionally, as the part of the property income flows are received by other economic sectors than the households, the distribution of primary income, i.e. income before redistribution, of different income deciles has not changed significantly in the past twenty years.Peer reviewe

Durable goods and their effect on household saving ratios in the euro area

The purpose of this paper is to estimate the impact of capitalising durable goods on the Euro area household saving ratios and disposable incomes for the first time. The reason for this exercise is twofold. Firstly, it is generally accepted that individual households regard consumer durables as assets even though they are not treated as such in the System of National Accounts 1993. Secondly, the issue is related to the definition of household saving ratios. For instance, the U.S. Federal Reserve Board publishes three household saving measures. The main difference between these saving ratios is that one is derived by treating expenditure on consumer durables as investments while the other ones are compiled by considering them to be household final consumption expenditure. We find that the effect of capitalising consumer durables on EA saving ratios is moderate. The impact is lower than it is in the US. JEL Classification: E21, E22asset, disposable income, durable good, saving ratio, user cost

The effect of durable goods and ICT on euro area productivity growth?

The present System of National Accounts (SNA93) treats durable consumption goods as consumption goods rather than investment although rentals for owner occupied households is imputed into GDP. We argue that households de facto treat the purchase of durable goods as investments and thus, the treatment of durables as capital assets conceptually does not differ from the present treatment of owner occupied dwellings. This is not captured by the economic analysis based on current statistical conventions. The purpose of this paper is to estimate the effect of durable goods and ICT on euro area economic growth and productivity change; when expenditure on consumer durables is recorded as capital investment. The capitalization of consumer durables impacts both the levels and growth rates of the capital stock, productivity and GDP. Our growth accounting computations demonstrated that the capital services of durables contributed one-tenth of economic growth and one-eight of labour productivity growth in 1995-2004. ICT's impacts were larger, i.e., one-fifth of GVA growth and one-sixth of labour productivity growth. JEL Classification: E01, E21, E22, J24, O11asset, durable good, household production, ICT, productivity, technological transformation, user cost

Job polarisation and household borrowing

The last few decades have been accompanied by disruptive changes to the structure of employment which have led to deterioration in demand for middle-skill occupations, a process known as job polarisation. As the demand for middle-skill workers shrinks, expectations about households’ income through their lifetime horizon are adjusted. It is unclear whether these expectations can loop back into the credit system, and affect the lending b ehaviour of credit institutions, or whether this process impacts on the households’ self-assessment of their opportunities to borrow money. In this paper, we study how the process of job polarisation affects credit demand and supply, studying its relationship with credit constraint and credit qualit

Is the financial market driving income distribution? – An analysis of the linkage between income and wealth in Europe

Globalisation has a major impact on the levels and distribution of wealth. The financial markets are highly integrated, and valuations of financial assets follow international patterns, which has contributed to large increases in financial wealth over the past 25 years. Nonetheless, this has not led to an equally large increase in property income because the rates of return have decreased during the same era. Moreover, changes in functional income distribution (capital/labour shares) have not been fully transmitted to the distribution of primary income between households because other institutional sectors – particularly the government sector – hold considerable amounts of financial assets. At least in the short term, the decrease in rates of return seems to contradict claims that, due to an increase in both financial and inherited wealth, we are entering an era of increasing income inequality. In this article, the link between financial wealth and pre-tax household income distribution is scrutinised for three European countries using a conceptually fully consistent macro framework. First, national balance sheets are combined with the related income flows. After this, income flows that are not property income but are considered part of national income (e.g., wages and salaries) are added, the national income flows are broken down by institutional sector and the household sector income flows separated. Finally, distributional household micro data are used to break down the aggregate household sector income flows by income decile. The article utilises this framework to analyse the evolution of rates of return and capital and labour shares as well as how the property income flows created by financial wealth have affected household primary income distribution.Globalisation has a major impact on the levels and distribution of wealth. The financial markets are highly integrated, and valuations of financial assets follow international patterns, which has contributed to large increases in financial wealth over the past 25 years. Nonetheless, this has not led to an equally large increase in property income because the rates of return have decreased during the same era. Moreover, changes in functional income distribution (capital/labour shares) have not been fully transmitted to the distribution of primary income between households because other institutional sectors – particularly the government sector – hold considerable amounts of financial assets. At least in the short term, the decrease in rates of return seems to contradict claims that, due to an increase in both financial and inherited wealth, we are entering an era of increasing income inequality. In this article, the link between financial wealth and pre-tax household income distribution is scrutinised for three European countries using a conceptually fully consistent macro framework. First, national balance sheets are combined with the related income flows. After this, income flows that are not property income but are considered part of national income (e.g., wages and salaries) are added, the national income flows are broken down by institutional sector and the household sector income flows separated. Finally, distributional household micro data are used to break down the aggregate household sector income flows by income decile. The article utilises this framework to analyse the evolution of rates of return and capital and labour shares as well as how the property income flows created by financial wealth have affected household primary income distribution

Digital currencies in financial networks

We introduce a digital currency, either as a central bank digital currency (CBDC) or a financial crypto asset (stablecoin), in the network of financial accounts. Simulating a shift of deposits by both households and non-financial corporations from the banking sector to the digital currency, we model the different responses of the affected institutional sectors. We find that the introduction of a digital currency generates significant adjustments in the balance sheets of all sectors, may trigger large moves in securities prices and induces changes in the network structure. The economic impacts vary depending on the design of the digital innovation, the size of the deposit shift, the channels through which the balance sheet adjustments take place and the timing of the initiative

Työmarkkinoiden polarisaatio ja kotitalouksien lainanotto

Tämä artikkeli asettuu kahden tutkimuskirjallisuuden nivelkohtaan: työmarkkinoiden polarisaation ja luottomarkkinoilta syrjäytymisen. Viime vuosikymmenien aikana työmarkkinat ovat olleet voimakkaassa muutoksessa: hyvätuloisten asiantuntijoiden asema on korostunut ja samalla heidän paikkansa myös tulojaon kärkipäässä on vahvistunut. Toisaalta työmarkkinoiden polarisaation myötä keskivaativien töiden asema, pysyvyys ja tulotaso on suhteellisesti heikentynyt. Tässä artikkelissa tarkastelemme työmarkkinoiden polarisaation vaikutusta viiden ja viidentoista vuoden aikaväleillä lainansaantiin. Keskitymme kotitalouksiin, joilla on selvä lainantarve ja tältä pohjalta identifioimme kaksi mahdollista pääskenaariota: omatoimisen ekskluusion tai päätöksen hakea lainaa. Jälkimmäinen jakautuu kolmeen vaihtoehtoon: normaaliin lainanmyöntöön, lainanmyöntöön korkeammalla korolla tai ekskluusioon lainamarkkinoilta eli negatiiviseen lainapäätökseen. Artikkelin johtopäätös on, että yleisesti Euroopassa työmarkkinoiden polarisaatiolla ja lainarahoituksella on selvä korrelaatio. Suomen osalta kuitenkin tämä korrelaatio on lähes olematon. Tämä viittaa siihen, että rahoituslaitokset nojaavat Suomessa lainapäätöksissään muihin tekijöihin kuin eri ammattien työmarkkina-asemaan. Toisaalta lainanhakijat ovat tietoisia, että heidän ammattinsa ei vaikuta suoranaisesti siihen, myönnetäänkö heille lainaa vai ei.Peer reviewe

Is the Top Tail of the Wealth Distribution the Missing Link between the Household Finance and Consumption Survey and National Accounts?

The financial accounts of the household sector within the system of national accounts report the aggregate asset holdings and liabilities of all households within a country. In principle, when household wealth surveys are explicitly designed to be representative of all households, aggregating these microdata should correspond to the macro-aggregates. In practice, however, differences are large. We first discuss conceptual and generic differences between those two sources of data. Thereafter, we investigate missing top tail observation from wealth surveys as a source of discrepancy. By fitting a Pareto distribution to the upper tail, we provide an estimate of how much of the gap between the micro- and macrodata is caused by the underestimation of the top tail of the wealth distribution. Conceptual and generic differences, as well as missing top tail observations, explain part of the gap between financial accounts and survey aggregates.Peer reviewe

“Velkakello tikittää”: Julkisyhteisöjen velka suomalaisessa mielikuvastossa ja tilastoissa 2000–2020

Peer reviewe