Vol. 4, No. 2

Mukul Majumdar and Tapan Mitra:
Intertemporal decentralization (pp. 79–103)


The classic papers of Malinvaud and Samuelson pointed out that even in ”classical” infinite horizon economies a competitive program of resource allocation need not be efficient or Pareto optimal. This led to the more general question of designing allocation mechanisms in the sense of Hurwicz that are decentralized intertemporally and have appealing normative properties. The paper first reviews some recent results on this topic and goes on to survey properties of evolutionary processes that do not involve communication with future agents.

Veijo Kaitala, Matti Pohjola and Olli Tahvonen:
An analysis of SO2 negotiations between Finland and the Soviet Union (pp. 104–112)


This paper considers Finnish-Soviet environmental cooperation. It is shown that efficient cooperation on reducing sulphur emissions may entail financial transfers from Finland to the Soviet Union because marginal abatement costs are much lower there. Soviet emissions should be drastically reduced in Kola peninsula and Estonia. The analysis is based on a sulphur transportation model, on estimated regional abatement cost functions and on the ’revealed-preference’ approach in estimating the damage costs from pollution.

Alpo Willman:
Why there is a lower bound on the central bank’s foreign reserves (pp. 113–129)


This article examines the implications for the balance of payments of imposing a cash-in-advance constraint on financal market transactions. I show that with a welfare-maximizing government this constraint introduces a lower bound on the central bank’s net foreign reserves; the depletion of the net foreign reserves below zero results in a welfare loss. I further show that either the private or public sector solvency constraint is violated, if the growth rate ofdomestic credit expansion exceeds a critical magnitude, which is somewhat below the foreign interest rate. Unlike in Buiter (198?), the violation of the solvency constraint does not depend on the way the credit expansion is used. The timing and the size of the speculative attack associated with an anticipated exchange rate regime shift are, however, dependent on the way the credit expansion is injected into the economy.

Kimmo Virolainen:
Corporate tax exhaustion and financial policy: evidence on Finnish data (pp. 130–141)


This paper examines in detail the empirical implications concerning taxation and optimal borrowing of the so called tax shelter-bankruptcy cost model. It is shown that in an institutional environment which allows the use of relatively large non-debt related tax shields, it is possible that firms exhaust the tax benefit of debt financing already at riskless debt levels. This, in turn, implies that the relevance of risk factors of debt in explaining optimal financial structure may be related to the firm’s expected tax status. Empirical findings on a sample of Finnish manufacturing firms support the hypothesis that there are differences in the borrowing behaviour between tax exhausted and non-tax exhausted

Christian C. Starck:
The interest rate elasticity of aggregate consumption: a time varying parameter approach (pp. 142–153)


The aim of this note is to examine whether the empirically documented positive interest rate elasticity of aggregate consumption in Finland is an artefact due to the previously widespread credit rationing. The aim is carried out using a novel time valying parameter approach and data from the period 1960-1989. The empirical evidence lendsfurther support for apositive interest rate elasticity of aggregate consumption. The elasticity seems to have increased over time, especially in recent years. To some extent, this mirrors a gradual easening up of credit rationing, which has been particularly rapid in recent years.

Jaakko Pehkonen:
A note on the joint movements of the Phillips and beveridge curves (pp. 154–162)


In his recent study Blanchard (1989) investigates the nature and origin of persistent unemployment by a joint examination of the movements of the Phillips and Beveridge curves. According to Blanchard, the persistence of unemployment can be associated either with the reallocation or the bargaining factors, depending upon the degree of correlation between the shifts in the Phillips and Beveridge curves: If both curves shift simultaneously this provides support for the reallocation explanation of the rise in the non-accelerating rate of unemployment; if the shifts are not correlated, this implies that the bargaining factors explain the persistence of high unemployment. The aim of the present study is to investigate the usefulness of the testing methodology proposed and employed in Blanchard’s study. This is done by examining the robustnesses of the results derived from such an analysis with respect to various specifications of the Phillips and Beveridge curves and different time periods. The analysis is carried out by using aggregate data on the Finnish economy from the period 1960-1987. The main result of the study is that no precise conclusions can be obtained by employing the proposed research strategy.

Finnish Economic Papers 2/1991