Vol. 6, No. 2

Pasi Holm, Seppo Honkapohja and Erkki Koskela:
Incidence effects of proposed reforms for the payroll tax in Finnish manufacturing (pp. 67–78)


The main proposals for the reform of payroll-based employers’ social security contributions have been the (partial) replacement of the contribution by increased sales tax and the so called SII-contribution, in which the base would consist of the wage bill and the operating margin of the firm. In this study models for the determination of wages, employment and investment in Finnish industry are estimated. These models are then used to simulate the effects of the proposed reforms on the same variables. The effects of both reform proposals are qualitatively similar. Both reforms would raise nominal wages and employment. They would also reduce capital formation. Real wages would probably remain roughly constant in the case of the SII-contribution, while they would fall in the shift to sales taxation. In percentage terms, the effects on the real variables would be small, less than one percentage point in magnitude. The effects on real wages depend on the degree of shifting of the increased sales tax or SII-contribution to output prices. Both reform proposals aim at moving away from a method of finance that is based entirely on a payroll tax towards a general tax on factors of production.

(JEL: H22, J38)

Graziella Bertocchi:
Marketing of public debt: the fixed-price technique (pp. 79–88)


We develop a simple model in which government bonds are marketed at a present yield, rather than at a competitive one, and we study the consequences of this debt management choice on market equilibrium and the dynamics of debt accumulation. We show how equilibrium sequences with demand rationing are associated with interest costs that are higher than under competition and that supply rations are unsustainable. In the long run, if the debt manager follows an optimal policy in terms of service costs minimization and consistently responds to the signals represented by the rations, the economy converges to the competitive stationary state with no debt.

(JEL: E00, E6)

Clas Eriksson:
Mitigating the trade-off between equality and dynamic efficiency (pp. 89–95)


In a model where decisions on income distribution and investment are separated beltween two classes (workers and capitalists), Lancaster (1973) showed that dynamic inefficiency will occur. The reason is that investors do not internalise the external effects of investment. In two kinds of growth models, this paper proposes income distribution rules that reduce or eliminate these problems, by separating the considerations on efficiency and income distribution from each other.

(JEL: O41, D33)

Claes-Håkan Gustafson and Henry Ohlsson:
Inventory investment in Swedish manufacturing firms (pp. 96–107)


We derive optimal long-run inventory stocks of finished goods and input materials in a dynamic flexible accelerator model. The predictions are tested on aggregate Swedish manufacturing data using an error correction approach. Cointegration regressions yield stationary relationships and parameter estimates with signs predicted by theory. Error correction estimations show that inventories adjust to long-run levels in a year. The cross effect of excess material inventories on finished goods inventories is strong. Inventory investment subsidies significantly affect finished goods inventory investment. Input deliveries are slow to adjust to new output rates.

(JEL: E22)

Per Frennberg and Björn Hansson:
Some distributional properties of monthly stock returns in Sweden 1919–1990 (pp. 108–122)


This paper examines the distributional properties of a newly constructed dataset of monthly returns on the Swedish stock market. The standard assumptions that stock returns are log-normally distributed, serially independent, non-seasonal and homoscedastic are all rejected by data. Swedish stock returns are more likely to belong to a peaked and fat-tailed distribution, with positive first order autocorrelation, strong seasonality and changing volatility over time. These results are well in line with what has been reported from other national stock markets. Our major conclusion is that, given the failure of data to meet the usual distributional assumptions in finance, it may be worthwhile to pay more attention to modeling both the return generating process and the volatility generating process for the market index, instead of simply assuming a strict random walk model.

(JEL: G12, G14)

Krister Rindell:
On the use of the Black & Scholes model in a stochastic interest rate economy (pp. 123–130)


his paper examines the pelformance of the Black & Scholes (1973) model for pricing of European style stock options in a stochastic interest rate economy. Throughout the paper we assume that Jarrow”s (1988) version of the Merton (1973) model correctly describes the reality. We examine the implications of two standard estimation methods of the value of the volatility parameter in the Black & Scholes model, the historical estimate method and the implied value method, respectively. Specific formulae are given in order to determine ’whether the Black & Scholes model under- or overprices options. Numerical examples show that, in some cases, the pricing error can be sizeable even for short term options.

(JEL: G13)

Finnish Economic Papers 2/1993

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