The Effects of EMU on the Finnish Economy - Some Early Conjectures

This paper analyses the convergence of the Finnish economy to the monetary policy regime of the EMU. We review the expectations on the effects of EMU membership which prevailed before the union was established, and compare those with actual outcomes for Finland in the first years of the EMU. It seems that the de facto membership in the new policy regime, began approximately at the beginning of 1997. The significant improvement of some traditional structural imbalances of the Finnish economy is reported. It is argued that the improvement of monetary policy credibility can explain much of the improved performance of the economy.

The Value of Publishing Official Central Bank Forecasts

The aim of the present analysis is to shed light on the question whether Central Banks should publish their macroeconomic forecasts, and what could possibly be gained in monetary policy if they did so. We show that disclosing the Central Bank’s assessment of the prevailing inflationary pressures in the form of a forecast improves macroeconomic performance even if this assessment is imprecise. This is because it makes policy more predictable. We are also interested in finding out the useful content of the forecasts, if published, and answering the question whether it makes a difference if these official forecasts are “unconditional” in the sense of incorporating the Central Bank’s forecasts of its own policy as well, or “conditional” on some other policy assumption. Possible conditional alternatives may include assuming unchanged instruments, however specified, or assuming the kind of policy that the private sector is estimated to expect. The analysis comes out in favour of publishing unconditional forecasts, which reveal the intended results of monetary policy. A discussion of some practical issues related to publishing official macroeconomic forecasts is also provided.forecasting; transparency; monetary policy; central banks

International economic spillovers and the liquidity trap

We study the effect of the zero bound constraint of interest rates on international transmission of eco-nomic policy and supply shocks. After some preliminary analysis with a simple theoretical model, we ap-ply a rich two-country simulation model to the problem. The model framework consists of EDGE, Bank of Finland’s dynamic equilibrium model for the euro area, linked to a similar model calibrated to resem-ble the US economy. The models have new Keynesian properties because of price rigidities and forward-looking pricing, consumption and investment behaviour. We assume freely floating exchange rates. Monetary policies are modelled with Taylor type policy rules, taking into account the zero bound con-straint for interest rates. We find that effects of policy and supply side shocks differ significantly from the ‘normal’ situation if one of the countries is in the ‘liquidity trap’, ie if the interest rate is constrained by the zero bound. Being in the liquidity trap amplifies the domestic effects of fiscal policy, but mitigates its spillover to abroad. Changing the long run inflation target, which does not have international spillovers in the normal case, does have effects abroad if the country where the target is changed is in a temporary li-quidity trap. The effects of supply shocks are also very different in the liquidity trap case compared to the normal case.zero bound; liquidity trap; international spillovers; edge

Stock exchange alliances, access fees and competition

This paper investigates the market consequences of alliance formation among stock exchanges. These alliances enable brokers to match investors internationally at their local market, thereby eliminating the need for brokers to maintain memberships in foreign stock exchanges. We sort out the conditions under which alliance formation increases profits for stock exchanges and brokers, and how changes in fee structures affect investors’ participation rates and welfare. Finally, we examine several methods for implementing access fees and their welfare implications.stock exchange alliances; access fees; competition among stock exchanges

Economies of scale and technological development in securities depository and settlement systems

The paper investigates the existence and extent of economies of scale in depository and settlement systems. Evidence from 16 settlement institutions across different regions for the years 1993–2000 indicates the existence of significant economies of scale. The degree of such economies, however, differs by size of settlement institution and region. While smaller settlement service providers reveal high potential of economies of scale, larger institutions show an increasing trend of cost effectiveness. Clearing and settlement systems in countries in Europe and Asia report substantially larger economies of scale than those of the US system. European cross-border settlement seems to be more cost intensive than that on a domestic level, reflecting chiefly complexities of EU international securities settlement and differences in the scope of international settlement services providers. The evidence also reveals that investments in implementing new systems and upgrades of settlement technology continuously improved cost effectiveness over the sample period.securities settlement, economies of scale, technological progress

Economies of scale and technological development in securities depository and settlement systems

The paper investigates the existence and extent of economies of scale in depository and settlement systems. Evidence from 16 settlement institutions across different regions for the years 1993–2000 indicates the existence of significant economies of scale. The degree of such economies, however, differs by size of settlement institution and region. While smaller settlement service providers reveal high potential of economies of scale, larger institutions show an increasing trend of cost effectiveness. Clearing and settlement systems in countries in Europe and Asia report substantially larger economies of scale than those of the US system. European cross-border settlement seems to be more cost intensive than that on a domestic level, reflecting chiefly complexities of EU international securities settlement and differences in the scope of international settlement services providers. The evidence also reveals that investments in implementing new systems and upgrades of settlement technology continuously improved cost effectiveness over the sample period.securities settlement; economies of scale; technological progress

A Model of Common Monetary Policy

This paper analyses the prerequisites for and the results of unanimous monetary policy decisions in a monetary union consisting of heterogeneous members. The analysis is based on a multicountry version of Rogoff's model of the determination of monetary policy in the presence of supply shocks. It is shown that an international transfer system can be designed which creates consensus both on the average rate of inflation and the common response to asymmetric shocks to the participating economies. We conjecture that this kind of transfer mechanisms, institutionalized or informal, supporting joint decisions tend to evolve in contexts where there is strong aversion of disagreement. Monetary policy is arguably such a context, because frequent disagreement within the decision-making body could be harmful to credibility. The transfer system capable of supporting consensus on monetary policy can be based on activity-related, automatic subsidies for countries which would individually prefer lower inflation rates, and activity-related taxes for countries which would prefer higher inflation in absence of the transfer system. It turns out that the common monetary policy created by unanimous decisions under the supporting transfer mechanism can be characterized as a weighted average of the national "stand-alone" inflation rates, i.e. the rates which would prevail without the monetary union. The weights of the countries are not related to the sizes of the national economies, but rather to the national attitudes towards inflation and transfer income. Countries with a low stand-alone rate of inflation get a large weight in the determination of the common monetary policy, as do the countries which have a relatively low marginal valuation of international transfer income.positive inflation theory; monetary union; monetary policy