Vol. 10, No. 2

Seppo Honkapohja and Urho Lempinen:
Growth, inflation, and economic policy in a stochastic cash-in-advance economy (pp. 51–66)


We develop a continuous-time stochastic growth model with recursive preferences, money and public debt. In equilibrium growth and inflation follow geometric Brownian motions, with parameters determined by solving a system of nonlinear equations. Permanent changes in government expenditures and taxes have both real and nominal effects producing often reverse Mundell-Tobin effects. Superneutrality holds when money supply changes are caused by open market operations, irrespective of the primary fiscal stance. The magnitude of the policy effects are examined using a calibrated version of the model.

(JEL: E63, H63)

Hovick Shahnazarian:
A theoretical evaluation of the Swedish corporate tax reform act of 1994 (pp. 67–80)


This paper studies the implications of the Swedish tax reform of 1994, by explicitly modeling some unusual features of the tax code such as the Annell deduction and the tax equalization reserve (SURV). The paper is about the effects of tax policy on corporate investment and financial structure. Financial preferences are derived using pairwise comparisons, and the weighted average cost of capital is evaluated. This is done by allowing for endogenous adjustment in the firm’s financial choices. This paper demonstrates how theoretical and numerical analysis can be combined to evaluate the overall effects of simultaneous changes in several tax parameters.

(JEL: G30, G31, G32, G35, G39, H25)

Malin Adolfson:
Exchange rate pass-through to Swedish import prices (pp. 81–98)


Swedish import price determination is investigated using disaggregated monthly data from 1980:1 to 1995:05 for eight different industries. The cointegration analysis indicates two cOintegrating relations, in all industries, between import prices, the exchange rate, world market prices and domestic prices. Two-equations systems involve an unclear definition of long-run exchange rate pass-though. Passthrough is defined as the total effect a nominal exchange-rate change has on the import price. The estimate thus includes the direct effect on import prices as well as the effect working through home market prices. Total pass-through estimates indicate a limited pass-through and thus pricing to market behaviour in the majority of industries. Tests of linear restrictions on the cointegrating vectors indicate, in a more formal, statistical sense, a complete long-run pass-through in most industries.

(JEL: F31, F41)

Annika Alexius:
Import prices and nominal exchange rates in Sweden (pp. 99–107)


The relationship between the nominal exchange rate and import prices is central to the determination of inflation in a small open economy like Sweden. Since the pass-through of exchange rate changes to import prices appears to be affected by the size of the country, it may be expected to be higher in Sweden than what has been documented for major nations. Using the Johansen (1988) approach to cointegration, the long-run pass-through of exchange rate changes to import prices on manufactured goods is estimated to be 0.6-0.8. This is slightly higher than what is typically found for small countries. A second result is that import prices are affected by Swedish macroeconomic conditions, which violates the small open economy assumption. Finally, neither the law of one price nor the small open economy assumption is rejected in the case of Swedish oil imports.

(JEL: F14, F31, F41)

Finnish Economic Papers 2/1997