The Macroeconomic Effects of Fiscal Policy in a Small Open Economy under a Flexible Exchange Rate Regime

This licentiate's thesis analyzes the macroeconomic effects of fiscal policy in a small open economy under a flexible exchange rate regime, assuming that the government spends exclusively on domestically produced goods. The motivation for this research comes from the observation that the literature on the new open economy macroeconomics (NOEM) has focused almost exclusively on two-country global models and the analyses of the effects of fiscal policy on small economies are almost completely ignored. This thesis aims at filling in the gap in the NOEM literature and illustrates how the macroeconomic effects of fiscal policy in a small open economy depend on the specification of preferences. The research method is to present two theoretical model that are extensions to the model contained in the Appendix to Obstfeld and Rogoff (1995). The first model analyzes the macroeconomic effects of fiscal policy, making use of a model that exploits the idea of modelling private and government consumption as substitutes in private utility. The model offers intuitive predictions on how the effects of fiscal policy depend on the marginal rate of substitution between private and government consumption. The findings illustrate that the higher the substitutability between private and government consumption, (i) the bigger is the crowding out effect on private consumption (ii) and the smaller is the positive effect on output. The welfare analysis shows that the less fiscal policy decreases welfare the higher is the marginal rate of substitution between private and government consumption. The second model of this thesis studies how the macroeconomic effects of fiscal policy depend on the elasticity of substitution between traded and nontraded goods. This model reveals that this elasticity a key variable to explain the exchange rate, current account and output response to a permanent rise in government spending. Finally, the model demonstrates that temporary changes in government spending are an effective stabilization tool when used wisely and timely in response to undesired fluctuations in output. Undesired fluctuations in output can be perfectly offset by an opposite change in government spending without causing any side-effects.

Characterization of Ion-Exchange Fibers for Controlled Drug Delivery

Increasing attention has been focused on methods that deliver pharmacologically active compounds (e.g. drugs, peptides and proteins) in a controlled fashion, so that constant, sustained, site-specific or pulsatile action can be attained. Ion-exchange resins have been widely studied in medical and pharmaceutical applications, including controlled drug delivery, leading to commercialisation of some resin based formulations. Ion-exchangers provide an efficient means to adjust and control drug delivery, as the electrostatic interactions enable precise control of the ion-exchange process and, thus, a more uniform and accurate control of drug release compared to systems that are based only on physical interactions. Unlike the resins, only few studies have been reported on ion-exchange fibers in drug delivery. However, the ion-exchange fibers have many advantageous properties compared to the conventional ion-exchange resins, such as more efficient compound loading into and release from the ion-exchanger, easier incorporation of drug-sized compounds, enhanced control of the ion-exchange process, better mechanical, chemical and thermal stability, and good formulation properties, which make the fibers attractive materials for controlled drug delivery systems. In this study, the factors affecting the nature and strength of the binding/loading of drug-sized model compounds into the ion-exchange fibers was evaluated comprehensively and, moreover, the controllability of subsequent drug release/delivery from the fibers was assessed by modifying the conditions of external solutions. Also the feasibility of ion-exchange fibers for simultaneous delivery of two drugs in combination was studied by dual loading. Donnan theory and theoretical modelling were applied to gain mechanistic understanding on these factors. The experimental results imply that incorporation of model compounds into the ion-exchange fibers was attained mainly as a result of ionic bonding, with additional contribution of non-specific interactions. Increasing the ion-exchange capacity of the fiber or decreasing the valence of loaded compounds increased the molar loading, while more efficient release of the compounds was observed consistently at conditions where the valence or concentration of the extracting counter-ion was increased. Donnan theory was capable of fully interpreting the ion-exchange equilibria and the theoretical modelling supported precisely the experimental observations. The physico-chemical characteristics (lipophilicity, hydrogen bonding ability) of the model compounds and the framework of the fibrous ion-exchanger influenced the affinity of the drugs towards the fibers and may, thus, affect both drug loading and release. It was concluded that precisely controlled drug delivery may be tailored for each compound, in particularly, by choosing a suitable ion-exchange fiber and optimizing the delivery system to take into account the external conditions, also when delivering two drugs simultaneously.

UV-induced NOy emissions in gas-exchange chambers enclosing Scots pine shoots: an analysis on their origin and significance

It is essential to have a thorough understanding of the sources and sinks of oxidized nitrogen (NOy) in the atmosphere, since it has a strong influence on the tropospheric chemistry and the eutrophication of ecosystems. One unknown component in the balance of gaseous oxidized nitrogen is vegetation. Plants absorb nitrogenous species from the air via the stomata, but it is not clear whether plants can also emit them at low ambient concentrations. The possible emissions are small and difficult to measure. The aim of this thesis was to analyse an observation made in southern Finland at the SMEAR II station: solar ultraviolet radiation (UV) induced NOy emissions in chambers measuring the gas exchange of Scots pine (Pinus sylvestris L.) shoots. Both measuring and modelling approaches were used in the study. The measurements were performed under noncontrolled field conditions at low ambient NOy concentrations. The chamber blank i.e. artefact NOy emissions from the chamber walls, was dependent on the UV irradiance and increased with time after renewing the Teflon film on chamber surfaces. The contribution of each pine shoot to the total NOy emissions in the chambers was determined by testing whether the emissions decrease when the shoots are removed from their chambers. Emissions did decrease, but only when the chamber interior was exposed to UV radiation. It was concluded that also the pine shoots emit NOy. The possible effects of transpiration on the chamber blank are discussed in the summary part of the thesis, based on previously unpublished data. The possible processes underlying the UV-induced NOy emissions were reviewed. Surface reactions were more likely than metabolic processes. Photolysis of nitrate deposited on the needles may have generated the NOy emissions; the measurements supported this hypothesis. In that case, the emissions apparently would consist mainly of nitrogen dioxide (NO2), nitric oxide (NO) and nitrous acid (HONO). Within studies on NOy exchange of plants, the gases most frequently studied are NO2 and NO (=NOx). In the present work, the implications of the emissions for the NOx exchange of pine were analysed with a model including both NOy emissions and NOy absorption. The model suggested that if the emissions exist, pines can act as an NOx source rather than a sink, even under relatively high ambient concentrations.

Studies on the international effects of real shocks

This doctoral thesis addresses the macroeconomic effects of real shocks in open economies in flexible exchange rate regimes. The first study of this thesis analyses the welfare effects of fiscal policy in a small open economy, where private and government consumption are substitutes in terms of private utility. The main findings are as follows: fiscal policy raises output, bringing it closer to its efficient level, but is not welfare-improving even though government spending directly affects private utility. The main reason for this is that the introduction of useful government spending implies a larger crowding-out effect on private consumption, when compared with the `pure waste' case. Utility decreases since one unit of government consumption yields less utility than one unit of private consumption. The second study of this thesis analyses the question of how the macroeconomic effects of fiscal policy in a small open economy depend on optimal intertemporal behaviour. The key result is that the effects of fiscal policy depend on the size of the elasticity of substitution between traded and nontraded goods. In particular, the sign of the current account response to fiscal policy depends on the interplay between the intertemporal elasticity of aggregate consumption and the elasticity of substitution between traded and nontraded goods. The third study analyses the consequences of productive government spending on the international transmission of fiscal policy. A standard result in the New Open Economy Macroeconomics literature is that a fiscal shock depreciates the exchange rate. I demonstrate that the response of the exchange rate depends on the productivity of government spending. If productivity is sufficiently high, a fiscal shock appreciates the exchange rate. It is also shown that the introduction of productive government spending increases both domestic and foreign welfare, when compared with the case where government spending is wasted. The fourth study analyses the question of how the international transmission of technology shocks depends on the specification of nominal rigidities. A growing body of empirical evidence suggests that a positive technology shock leads to a temporary decline in employment. In this study, I demonstrate that the open economy dimension can enhance the ability of sticky price models to account for the evidence. The reasoning is as follows. An improvement in technology appreciates the nominal exchange rate. Under producer-currency pricing, the exchange rate appreciation shifts global demand toward foreign goods away from domestic goods. This causes a temporary decline in domestic employment.

Elements of Volatility at High Frequency

Volatility is central in options pricing and risk management. It reflects the uncertainty of investors and the inherent instability of the economy. Time series methods are among the most widely applied scientific methods to analyze and predict volatility. Very frequently sampled data contain much valuable information about the different elements of volatility and may ultimately reveal the reasons for time varying volatility. The use of such ultra-high-frequency data is common to all three essays of the dissertation. The dissertation belongs to the field of financial econometrics. The first essay uses wavelet methods to study the time-varying behavior of scaling laws and long-memory in the five-minute volatility series of Nokia on the Helsinki Stock Exchange around the burst of the IT-bubble. The essay is motivated by earlier findings which suggest that different scaling laws may apply to intraday time-scales and to larger time-scales, implying that the so-called annualized volatility depends on the data sampling frequency. The empirical results confirm the appearance of time varying long-memory and different scaling laws that, for a significant part, can be attributed to investor irrationality and to an intraday volatility periodicity called the New York effect. The findings have potentially important consequences for options pricing and risk management that commonly assume constant memory and scaling. The second essay investigates modelling the duration between trades in stock markets. Durations convoy information about investor intentions and provide an alternative view at volatility. Generalizations of standard autoregressive conditional duration (ACD) models are developed to meet needs observed in previous applications of the standard models. According to the empirical results based on data of actively traded stocks on the New York Stock Exchange and the Helsinki Stock Exchange the proposed generalization clearly outperforms the standard models and also performs well in comparison to another recently proposed alternative to the standard models. The distribution used to derive the generalization may also prove valuable in other areas of risk management. The third essay studies empirically the effect of decimalization on volatility and market microstructure noise. Decimalization refers to the change from fractional pricing to decimal pricing and it was carried out on the New York Stock Exchange in January, 2001. The methods used here are more accurate than in the earlier studies and put more weight on market microstructure. The main result is that decimalization decreased observed volatility by reducing noise variance especially for the highly active stocks. The results help risk management and market mechanism designing.

Modelling boreal forest CO2 exchange and seasonality

Man-induced climate change has raised the need to predict the future climate and its feedback to vegetation. These are studied with global climate models; to ensure the reliability of these predictions, it is important to have a biosphere description that is based upon the latest scientific knowledge. This work concentrates on the modelling of the CO2 exchange of the boreal coniferous forest, studying also the factors controlling its growing season and how these can be used in modelling. In addition, the modelling of CO2 gas exchange at several scales was studied. A canopy-level CO2 gas exchange model was developed based on the biochemical photosynthesis model. This model was first parameterized using CO2 exchange data obtained by eddy covariance (EC) measurements from a Scots pine forest at Sodankylä. The results were compared with a semi-empirical model that was also parameterized using EC measurements. Both of the models gave satisfactory results. The biochemical canopy-level model was further parameterized at three other coniferous forest sites located in Finland and Sweden. At all the sites, the two most important biochemical model parameters showed seasonal behaviour, i.e., their temperature responses changed according to the season. Modelling results were improved when these changeover dates were related to temperature indices. During summer-time the values of the biochemical model parameters were similar at all the four sites. Different control factors for CO2 gas exchange were studied at the four coniferous forests, including how well these factors can be used to predict the initiation and cessation of the CO2 uptake. Temperature indices, atmospheric CO2 concentration, surface albedo and chlorophyll fluorescence (CF) were all found to be useful and have predictive power. In addition, a detailed simulation study of leaf stomata in order to separate physical and biochemical processes was performed. The simulation study brought to light the relative contribution and importance of the physical transport processes. The results of this work can be used in improving CO2 gas exchange models in boreal coniferous forests. The meteorological and biological variables that represent the seasonal cycle were studied, and a method for incorporating this cycle into a biochemical canopy-level model was introduced.

Essays on Market Microstructure: Price Discovery and Informed Trading

Market microstructure is “the study of the trading mechanisms used for financial securities” (Hasbrouck (2007)). It seeks to understand the sources of value and reasons for trade, in a setting with different types of traders, and different private and public information sets. The actual mechanisms of trade are a continually changing object of study. These include continuous markets, auctions, limit order books, dealer markets, or combinations of these operating as a hybrid market. Microstructure also has to allow for the possibility of multiple prices. At any given time an investor may be faced with a multitude of different prices, depending on whether he or she is buying or selling, the quantity he or she wishes to trade, and the required speed for the trade. The price may also depend on the relationship that the trader has with potential counterparties. In this research, I touch upon all of the above issues. I do this by studying three specific areas, all of which have both practical and policy implications. First, I study the role of information in trading and pricing securities in markets with a heterogeneous population of traders, some of whom are informed and some not, and who trade for different private or public reasons. Second, I study the price discovery of stocks in a setting where they are simultaneously traded in more than one market. Third, I make a contribution to the ongoing discussion about market design, i.e. the question of which trading systems and ways of organizing trading are most efficient. A common characteristic throughout my thesis is the use of high frequency datasets, i.e. tick data. These datasets include all trades and quotes in a given security, rather than just the daily closing prices, as in traditional asset pricing literature. This thesis consists of four separate essays. In the first essay I study price discovery for European companies cross-listed in the United States. I also study explanatory variables for differences in price discovery. In my second essay I contribute to earlier research on two issues of broad interest in market microstructure: market transparency and informed trading. I examine the effects of a change to an anonymous market at the OMX Helsinki Stock Exchange. I broaden my focus slightly in the third essay, to include releases of macroeconomic data in the United States. I analyze the effect of these releases on European cross-listed stocks. The fourth and last essay examines the uses of standard methodologies of price discovery analysis in a novel way. Specifically, I study price discovery within one market, between local and foreign traders.

Performance Persistence of International Stock Funds

People saving in mutual funds often look at historical performance before they decide which funds to invest in. The implicit assumption made is that superior performance is likely to be repeated in the future. The findings presented in this study, which investigates funds sold on the Swedish market, support such an approach provided that the time horizons are limited to one year. International stock funds that have performed strongly one year are likely to outperform their peers also the following years. But if the historical and future time horizons are extended to two or three years, the positive relationship between past and future performance vanishes in most cases. Persistence tests focusing on the aggregated performance of fund companies were also carried out. These tests produced results rather similar to those on the individual fund level.

Performance of Finnish Mutual Funds: A Decomposition Approach

Mutual funds have increased in popularity among Finnish investors in recent years. In this study returns on domestic funds have been decomposed into several elements that measure different aspects of fund performance. The results indicate that fund managers in the long run tend to allocate fund capital between different stock categories in a profitable way. When it comes to the short term timing of their allocation decisions they are however unable to further improve overall performance. The evidence also suggests that managers possess the ability to pick above average performing stocks within the individual stock categories. During the investigated period most funds returned more than a broad benchmark index even after fees and indirect costs were taken into account.