Vol. 8, No. 2

Ulf Söderström and Alexis Stenfors:
Explaining devaluation expectations in the EMS (pp. 63–81)


This paper is an attempt to explain devaluation expectations in the ERM with macroeconomic fundamentals. Two different measures of devaluation expectations are used; expectations estimated using the drift-adjustment method of Bertola and Svensson (1993), and the directly observable interest rate differential. The interest rate differential seems more closely connected to macroeconomic fundamentals than the estimates stemming from the drift-adjustment method. For the ERM as a whole, an expanded monetary model of exchange rate determination explains a considerable part ofthe devaluation expectations, whereas for individual countries additional variables are important, but the relationships are ambiguous and country-specific.

(JEL: E43, E44, F31)

Matthias Wrede:
Tax evasion and growth (pp. 82–90)


In an overlapping generations model, in which savings and tax evasion are endogenous, tax evasion will have a negative effect on long-term growth if public services are productive inputs for private producers. It is shown in the paper that tax evasion reduces the endogenous growth rate. Moreover; the case of pure public consumption is considered. Growth is then exogenous at the steady state path. It is found out that the effect ofa tax-enforcement parameter change on the longrun equilibrium heavily depends on the intertemporal elasticity of substitution.

(JEL: H26, O41)

Sajid Anwar:
An impure public input as a determinant of trade (pp. 91–95)


This paper utilises an extended Ricardian model to examine the relationship between government spending on an impure public input and the pattern of trade.

(JEL: F11, F41)

Tor Jacobson:
Simulating small-sample properties of the maximum likelihood cointegration method: estimation and testing (pp. 96–107)


This paper analyzes – using Monte Carlo simulation – small-sample properties of the maximum likelihood cointegration method for estimation and inference in cointegrated systems. The simulations of a bivariate system concentrate on the following; the estimator of the cointegrating vector; the trace test for determining cointegrating rank, and the likelihood ratio and Wald tests for linear restrictions on the cointegrating vector: Furthermore, we introduce autoregressive conditional heteroscedasticity, as well as multivariate non-normality in the form of excess skewness and kurtosis, in the error process. All in all, the results suggest that the maximum likelihood method displays desirable features as long as the samples are of reasonable sizes.

(JEL: C15, C32)

Mika Linden:
Interest rate and inflation expectations in Finland 1987–1994: a case for the inverted fisher hypothesis (pp. 108–115)


The relationship between interest rates and the rate of inflation is analyzed with cointegration methods in the context of the inverted Fisher hypothesis. The hypothesis is not rejected. The results indicate that the main reasons for the interest rate behaviour in the period 1987/1-1 995/III were positive and over reacting dependence on foreign interest rates and negative dependence on the exchange rate. Real interest rates react to the inflation rate with a coefficient value of close to -1, and the inflation effects on the nominal rates are insignificant. One step recursive predictions of inflation process support the existence of a negative price expectations effect on the real interest rates.

(JEL: E37, E43, F41)

Finnish Economic Papers 2/1995