Vol. 2, No. 1

Alpo Willman:
If the markka floated: simulating the BOF4 model with fixed and floating exchange rates (pp. 3–19)


In this paper the BOF4 model of the Bank of Finland, which is estimated in a fixed exchange rate regime, is transformed into a model with a floating exchange rate. In endogenizing the exchange rate two alternative assumptions about the formation of exchange rate expectations are used, i.e. static and market- specific (MS) rational expectations. We found that under static expectations the adjustment paths of the exchange rate were very volatile when shocks originated from the financial market. In response to real shocks, however, the results were not sensitive with respect to the alternative expectations formation schemes.

In the case of MS-rational expectations the reactions of the exchange rate to real and financial shocks were, also somewhat greater than typically presented in the literature. In addition, the response paths were highly cyclical.

Esko Aurikko:
Rational exchange rate and price expectations under different exchange rate regimes in Finland (pp. 20–30)


In this paper a small aggregative model of the Finnish economy with rational exchange rate and price expectations is specified and estimated with quarterly data. Optimal exchange rate regimes are assessed by simulating the effects of various unanticipated and permanent shocks. According to the simulation results, fixed exchange rates seem to insulate the domestic economy from monetary shocks while floating rates are preferable if shocks are real.

Anne Mikkola:
Transactions demand for money, deregulation and stock exchanges (pp. 31–38)


In this paper money demand is estimated for the period 1983/1-1986/12 for which a market interest rate is available. It will also be studied whether the rapid increase in the total value of trading on the Helsinki Stock Exchange has had any impact on the transactions demand for money. The results give only slight support for the significance of the stock exchange variable as a determinant of money demand.

The estimation is carried out using both levels and difference specification. Cointegrating variables and error correction -models are also tested. The results show that money demand can validly be estimated without lagged dependent variable. Hence, it is legitimate to assume that money demand adjusts more or less immediately in which case estimation in levels specification gives satisfactory results.

Christian C. Starck:
How are the key Finnish market interest rates determined? (pp. 39–47)


Finnish money markets have undergone profound changes in recent years. In particular, the transition to a more market oriented system has changed the way domestic interest rates are formed. This paper presents and quantifies one way of describing the structure and main linkages of the current setting. Key elements of the model are the dependence of the domestic market interest rates on the foreign interest rate, an explicit formulation of the dependence of the domestic short-term market interest rate on purely domestic factors, and explicit considerations of various institutional features of the domestic money market. Empirical evidence on the formation of the domestic short-term and long-term market interest rates as well as short-term and long-term lending rates is presented, and the results are broadly consistent with the theoretical structure of the model.

Pentti Forsman and Tarja Heinonen:
Dynamic models of the roundwood market in Finland (pp. 48–54)


We contribute to the discussion of the reasons why the supply of roundwood has lagged behind the growth of forests since the early I970s. Our dynamic models of the roundwood market provide some evidence that the very low level of the real interest rate is an important reason for the sluggishness of fellings in private forests.

Seppo Laaksonen:
Use of panel data in applications of income dynamics (pp. 55–64)


By using panel data, the paper aims to (1) describe changes in the income of households and to (2) present an econometric model for explaining short-term changes in income. The data are derived from the income distribution statistics compiled by the Central Statistical Office of Finland. The panel feature has been a part of the statistics since 1982. According to the results, the income of households varies considerably from year to year. The explanatory power of the econometric model was satisfactory. The income level of the previous year turned out to be the best regressor: the panel data show that income differences level out regardless of what cross-section data may indicate. The next best regressors turned out to be changes in the socio-economic status and the composition of the household.

On the basis of the results, use of panel data can be recommended for research on income and on other applications ofeconomics. In the present study, the duration of the panel was only one year, which is why the application of the data is more limited than would be the case with longer panels. Long panels, on the other hand, suffer from a reduction in data due to nonresponse and overcoverage.

Outi Aarnio:
On the effects of duration on Finnish unemployment (pp. 65–81)


The overall exit rate from unemployment conditional on duration of unemployment is often shown to be downward sloping. This can be result of a) individual heterogeneity, i.e. some individuals have initially fewer chances finding of job than others or b) negative state-dependence. i.e. unemployment experience worsens individual exit probability from unemployment. This paper provides a test based on time series behaviour to exclude the pure heterogeneity hypothesis. We also apply the test on Finnish data and find support for rejecting pure heterogeneity in favour of some negative state-dependence effects.

Martti Vihanto:
The Austrian theory of price: an example (pp. 82–94)


This paper introduces a simple example for teaching the Austrian theory of price to undergraduate students. It is argued that market prices serve a social function, because plan discoordinations manifest themselves as discrepancies in prices. When plans can be freely expressed in terms of the same commodity (money), the quantities of this commodity (prices) can be compared with each other, and discrepancies between the plans (price differentials) can be perceived with relative ease by entrepreneurs. Traditionally, many economists have failed to understand that the function of market prices is more than merely summarizing market information.

Finnish Economic Papers 1/1989