Vol. 5, No. 2

Ian E. Novos:
Learning by doing and adverse selection: the importance of commitment (pp. 79–90)


The analysis in Novos (1990) is extended to incorporate a richer signalling dimension. Specifically, firms observe the evolving employment histories of workers. Results show, firstly, that when firms are not integrated across tasks there is an inefficient allocation of workers across tasks. Second, when firms are integrated across tasks workers are, ex-ante, efficiently allocated across tasks. Finally, when firm structure is an endogenous choice firms will choose to be integrated. A crucial role in the analysis is occupied by the idea of a »promotion commitment.» The central role often played by personnel departments in this regard is discussed.

(JEL: L22, T23, T82)

Jaime Marquez:
Spectral estimation of secular and cyclical elasticities for bilateral trade (pp. 91–97)


The paper uses spectral methods to estimate income and price elasticities for trade among Canada, Germany, Japan, the United Kingdom, the United States, other industrial countries, OPEC, and non-OPEC developing countries. By focusing on bilateral trade data, the paper avoids the aggregation biases associated with multilateral data. By differentiating between secular and cyclical elasticities, the paper recognizes that trade responses to secular expansions and to domestic bottlenecks need not be the same. Finally, by relying on spectral analysis, the paper isolates the secular and cyclical components of the data and thus avoids the drawbacks of time-domain analyses where a time trendproxies secular factors. To emphasize the usefulness of bilateral trade elasticities, the analysis re-examines the asymmetry in income elasticities noted by Houthakker and Magee and evaluates the loss of information associated with relying on multilateral trade data.

(JEL: C2, F4)

Olavi Rantala:
An econometric diffusion model of exchange rate movements within a band: implications for interest rate differential and credibility of exchange rate policy (pp. 98–109)


The paper presents a model ofexchange rate movements within a specified exchange rate band enforced by central bank interventions. The model is based on the empirical observation that the exchange rate has usually been strictly inside the band, at least in Finland. In this model the distribution of the exchange rate is truncated lognormal from the edges towards the center of the band and hence quite different from the bimodal distribution of the standard target zone model. The model is estimated using the daily observations of the changes in the FIM exchange rate since 1987. The estimated model is used to compute the expected future values of the FIM/ECU rate within the band for the period June 7, 1991- September 7, 1992 and the corresponding interest rate differential between Finland and EMS countries. Subtracting this from the actual interest rate differential gives a measure of expected devaluation and devaluation risk premium. The premium was very large in autumn 1991 before the devaluation in November but afterwards it decreased considerably. After a few months the devaluation pressure increased again and finally on September 8, 1992 markka was allowed to float.

(JEL: F3)

Mikael Linden:
Stochastic and deterministic trends in Finnish macroeconomic time series (pp. 110–116)


The appropriateness of the Dickey-Fuller unit root test is studied using two alternative unit root test models. The segmented trend model is strongly supported and the second-order trend model is favoured for some series. The sample set consists of observations of nine basic macroeconomic time series describing the fundamentals of the Finnish economy between 1860 and 1989. The results clearly show that care is required in interpreting unit-root tests since failure to reject does not entail that the null is true. Structural breaks in the data generating process, in this case wars starting in 1917 and 1939, support models of the deterministic trends class. However, it is argued that the univariate testing procedures laid down in the unit root literature do not provide information to macroeconomic controversies.

(JEL: C22)

Vesa Puttonen:
On the behaviour of the Finnish stock index options markets (pp. 117–128)


In this paper put-call-futures (PCF) parity and put-call-spot (PCS) parity are tested all the new Finnish stock index derivatives markets. Two levels of transaction costs are considered. Using daily closing price data, we find that, in particular, PCS parity is violated. The violations are due to the fact that the puts have been overpriced compared to the calls. The results suggest that the absence of an institutional framework for short selling of stocks is a factor contributing to discrepancies from price parities. Thus, option pricing in Finland is based on the futures price more than on the underlying index.

(JEL: G13)

Juha Kettunen:
A search theoretical analysis of the Finnish unemployment insurance system (pp. 129–138)


This paper studies the effects of the Finnish unemployment insurance on the re-employment of unemployed workers using a search theoretical framework. It is well known that the unemployment benefits have a negative effect on the re-employment. In this paper it is shown that the re-employment probability can be increased by lowering the costs of re-employment. Furthermore, it is shown that the qualifying waiting period has only a slight positive effect on the hazard function, but removing of the mobility rules and reduction of benefits after a fixed period of unemployment substantially increase the re-employment probability.

(JEL: J65)

Finnish Economic Papers 2/1992