Dynamics of inflation expectations in the euro area

The present study examines empirically the inflation dynamics of the euro area. The focus of the analysis is on the role of expectations in the inflation process. In six articles we relax rationality assumption and proxy expectations directly using OECD forecasts or Consensus Economics survey data. In the first four articles we estimate alternative Phillips curve specifications and find evidence that inflation cannot instantaneously adjust to changes in expectations. A possible departure of expectations from rationality seems not to be powerful enough to totally explain the persistence of euro area inflation in the New Keynesian framework. When expectations are measured directly, the purely forward-looking New Keynesian Phillips curve is outperformed by the hybrid Phillips curve with an additional lagged inflation term and the New Classical Phillips curve with a lagged expectations term. The results suggest that the euro area inflation process has become more forward-looking in the recent years of low and stable inflation. Moreover, in low inflation countries, the inflation dynamics have been more forward-looking already since the late 1970s. We find evidence of substantial heterogeneity of inflation dynamics across the euro area countries. Real time data analysis suggests that in the euro area real time information matters most in the expectations term in the Phillips curve and that the balance of expectations formation is more forward- than backward-looking. Vector autoregressive (VAR) models of actual inflation, inflation expectations and the output gap are estimated in the last two articles.The VAR analysis indicates that inflation expectations, which are relatively persistent, have a significant effect on output. However,expectations seem to react to changes in both output and actual inflation, especially in the medium term. Overall, this study suggests that expectations play a central role in inflation dynamics, which should be taken into account in conducting monetary policy.

A Cointegration Approach to Topics in Empirical Macroeconomics (summary section only)

Mikael Juselius’ doctoral dissertation covers a range of significant issues in modern macroeconomics by empirically testing a number of important theoretical hypotheses. The first essay presents indirect evidence within the framework of the cointegrated VAR model on the elasticity of substitution between capital and labor by using Finnish manufacturing data. Instead of estimating the elasticity of substitution by using the first order conditions, he develops a new approach that utilizes a CES production function in a model with a 3-stage decision process: investment in the long run, wage bargaining in the medium run and price and employment decisions in the short run. He estimates the elasticity of substitution to be below one. The second essay tests the restrictions implied by the core equations of the New Keynesian Model (NKM) in a vector autoregressive model (VAR) by using both Euro area and U.S. data. Both the new Keynesian Phillips curve and the aggregate demand curve are estimated and tested. The restrictions implied by the core equations of the NKM are rejected on both U.S. and Euro area data. These results are important for further research. The third essay is methodologically similar to essay 2, but it concentrates on Finnish macro data by adopting a theoretical framework of an open economy. Juselius’ results suggests that the open economy NKM framework is too stylized to provide an adequate explanation for Finnish inflation. The final essay provides a macroeconometric model of Finnish inflation and associated explanatory variables and it estimates the relative importance of different inflation theories. His main finding is that Finnish inflation is primarily determined by excess demand in the product market and by changes in the long-term interest rate. This study is part of the research agenda carried out by the Research Unit of Economic Structure and Growth (RUESG). The aim of RUESG it to conduct theoretical and empirical research with respect to important issues in industrial economics, real option theory, game theory, organization theory, theory of financial systems as well as to study problems in labor markets, macroeconomics, natural resources, taxation and time series econometrics. RUESG was established at the beginning of 1995 and is one of the National Centers of Excellence in research selected by the Academy of Finland. It is financed jointly by the Academy of Finland, the University of Helsinki, the Yrjö Jahnsson Foundation, Bank of Finland and the Nokia Group. This support is gratefully acknowledged.

Essays on macroeconomic effects of fiscal policy rules

Economic and Monetary Union can be characterised as a complicated set of legislation and institutions governing monetary and fiscal responsibilities. The measures of fiscal responsibility are to be guided by the Stability and Growth Pact, which sets rules for fiscal policy and makes a discretionary fiscal policy virtually impossible. To analyse the effects of the fiscal and monetary policy mix, we modified the New Keynesian framework to allow for supply effects of fiscal policy. We show that defining a supply-side channel for fiscal policy using an endogenous output gap changes the stabilising properties of monetary policy rules. The stability conditions are affected by fiscal policy, so that the dichotomy between active (passive) monetary policy and passive (active) fiscal policy as stabilising regimes does not hold, and it is possible to have an active monetary - active fiscal policy regime consistent with dynamical stability of the economy. We show that, if we take supply-side effects into ac-count, we get more persistent inflation and output reactions. We also show that the dichotomy does not hold for a variety of different fiscal policy rules based on government debt and budget deficit, using the tax smoothing hypothesis and formulating the tax rules as difference equations. The debt rule with active monetary policy results in indeterminacy, while the deficit rule produces a determinate solution with active monetary policy, even with active fiscal policy. The combination of fiscal requirements in a rule results in cyclical responses to shocks. The amplitude of the cycle is larger with more weight on debt than on deficit. Combining optimised monetary policy with fiscal policy rules means that, under a discretionary monetary policy, the fiscal policy regime affects the size of the inflation bias. We also show that commitment to an optimal monetary policy not only corrects the inflation bias but also increases the persistence of output reactions. With fiscal policy rules based on the deficit we can retain the tax smoothing hypothesis also in a sticky price model.

Essays on Labor Market Frictions, Technological Change and Macroeconomic Fluctuations

The dissertation consists of an introductory chapter and three essays that apply search-matching theory to study the interaction of labor market frictions, technological change and macroeconomic fluctuations. The first essay studies the impact of capital-embodied growth on equilibrium unemployment by extending a vintage capital/search model to incorporate vintage human capital. In addition to the capital obsolescence (or creative destruction) effect that tends to raise unemployment, vintage human capital introduces a skill obsolescence effect of faster growth that has the opposite sign. Faster skill obsolescence reduces the value of unemployment, hence wages and leads to more job creation and less job destruction, unambiguously reducing unemployment. The second essay studies the effect of skill biased technological change on skill mismatch and the allocation of workers and firms in the labor market. By allowing workers to invest in education, we extend a matching model with two-sided heterogeneity to incorporate an endogenous distribution of high and low skill workers. We consider various possibilities for the cost of acquiring skills and show that while unemployment increases in most scenarios, the effect on the distribution of vacancy and worker types varies according to the structure of skill costs. When the model is extended to incorporate endogenous labor market participation, we show that the unemployment rate becomes less informative of the state of the labor market as the participation margin absorbs employment effects. The third essay studies the effects of labor taxes on equilibrium labor market outcomes and macroeconomic dynamics in a New Keynesian model with matching frictions. Three policy instruments are considered: a marginal tax and a tax subsidy to produce tax progression schemes, and a replacement ratio to account for variability in outside options. In equilibrium, the marginal tax rate and replacement ratio dampen economic activity whereas tax subsidies boost the economy. The marginal tax rate and replacement ratio amplify shock responses whereas employment subsidies weaken them. The tax instruments affect the degree to which the wage absorbs shocks. We show that increasing tax progression when taxation is initially progressive is harmful for steady state employment and output, and amplifies the sensitivity of macroeconomic variables to shocks. When taxation is initially proportional, increasing progression is beneficial for output and employment and dampens shock responses.

Monetary policy rules and estimated reaction functions for the European Central Bank

This thesis studies the interest-rate policy of the ECB by estimating monetary policy rules using real-time data and central bank forecasts. The aim of the estimations is to try to characterize a decade of common monetary policy and to look at how different models perform at this task.The estimated rules include: contemporary Taylor rules, forward-looking Taylor rules, nonlinearrules and forecast-based rules. The nonlinear models allow for the possibility of zone-like preferences and an asymmetric response to key variables. The models therefore encompass the most popular sub-group of simple models used for policy analysis as well as the more unusual non-linear approach. In addition to the empirical work, this thesis also contains a more general discussion of monetary policy rules mostly from a New Keynesian perspective. This discussion includes an overview of some notable related studies, optimal policy, policy gradualism and several other related subjects. The regression estimations are performed with either least squares or the generalized method of moments depending on the requirements of the estimations. The estimations use data from both the Euro Area Real-Time Database and the central bank forecasts published in ECB Monthly Bulletins. These data sources represent some of the best data that is available for this kind of analysis. The main results of this thesis are that forward-looking behavior appears highly prevalent, but that standard forward-looking Taylor rules offer only ambivalent results with regard to inflation. Nonlinear models are shown to work, but on the other hand do not have a strong rationale over a simpler linear formulation. However, the forecasts appear to be highly useful in characterizing policy and may offer the most accurate depiction of a predominantly forward-looking central bank. In particular the inflation response appears much stronger while the output response becomes highly forward-looking as well.

Development of a new flexor tendon repair technique performed with bioabsorbable poly-L/D-lactide (PLDLA) suture

Sormen koukistajajännevamman korjauksen jälkeisen aktiivisen mobilisaation on todettu johtavan parempaan toiminnalliseen lopputulokseen kuin nykyisin yleisesti käytetyn dynaamisen mobilisaation. Aktiivisen mobilisaation ongelma on jännekorjauksen pettämisriskin lisääntyminen nykyisten ommeltekniikoiden riittämättömän vahvuuden vuoksi. Jännekorjauksen lujuutta on parannettu kehittämällä monisäieommeltekniikoita, joissa jänteeseen tehdään useita rinnakkaisia ydinompeleita. Niiden kliinistä käyttöä rajoittaa kuitenkin monimutkainen ja aikaa vievä tekninen suoritus. Käden koukistajajännekorjauksessa käytetään yleisesti sulamattomia ommelmateriaaleja. Nykyiset käytössä olevat biohajoavat langat heikkenevät liian nopeasti jänteen paranemiseen nähden. Biohajoavan laktidistereokopolymeeri (PLDLA) 96/4 – langan vetolujuuden puoliintumisajan sekä kudosominaisuuksien on aiemmin todettu soveltuvan koukistajajännekorjaukseen. Tutkimuksen tavoitteena oli kehittää välittömän aktiivisen mobilisaation kestävä ja toteutukseltaan yksinkertainen käden koukistajajännekorjausmenetelmä biohajoavaa PLDLA 96/4 –materiaalia käyttäen. Tutkimuksessa analysoitiin viiden eri yleisesti käytetyn koukistajajänneompeleen biomekaanisia ominaisuuksia staattisessa vetolujuustestauksessa ydinompeleen rakenteellisten ominaisuuksien – 1) säikeiden (lankojen) lukumäärän, 2) langan paksuuden ja 3) ompeleen konfiguraation – vaikutuksen selvittämiseksi jännekorjauksen pettämiseen ja vahvuuteen. Jännekorjausten näkyvän avautumisen todettiin alkavan perifeerisen ompeleen pettäessä voima-venymäkäyrän myötöpisteessä. Ydinompeleen lankojen lukumäärän lisääminen paransi ompeleen pitokykyä jänteessä ja suurensi korjauksen myötövoimaa. Sen sijaan paksumman (vahvemman) langan käyttäminen tai ompeleen konfiguraatio eivät vaikuttaneet myötövoimaan. Tulosten perusteella tutkittiin mahdollisuuksia lisätä ompeleen pitokykyä jänteestä yksinkertaisella monisäieompeleella, jossa ydinommel tehtiin kolmen säikeen polyesterilangalla tai nauhamaisen rakenteen omaavalla kolmen säikeen polyesterilangalla. Nauhamainen rakenne lisäsi merkitsevästi ompeleen pitokykyä jänteessä parantaen myötövoimaa sekä maksimivoimaa. Korjauksen vahvuus ylitti aktiivisen mobilisaation jännekorjaukseen kohdistaman kuormitustason. PLDLA 96/4 –langan soveltuvuutta koukistajajännekorjaukseen selvitettiin tutkimalla langan biomekaanisia ominaisuuksia ja solmujen pito-ominaisuuksia staattisessa vetolujuustestauksessa verrattuna yleisimmin jännekorjauksessa käytettävään punottuun polyesterilankaan (Ticron®). PLDLA –langan todettiin soveltuvan hyvin koukistajajännekorjaukseen, sillä se on polyesterilankaa venymättömämpi ja solmujen pitävyys on parempi. Viimeisessä vaiheessa tutkittiin PLDLA 96/4 –langasta valmistetulla kolmisäikeisellä, nauhamaisella jännekorjausvälineellä tehdyn jännekorjauksen kestävyyttä staattisessa vetolujuustestauksessa sekä syklisessä kuormituksessa, joka simuloi staattista testausta paremmin mobilisaation toistuvaa kuormitusta. PLDLA-korjauksen vahvuus ylitti sekä staattisessa että syklisessä kuormituksessa aktiivisen mobilisaation edellyttämän vahvuuden. Nauhamaista litteää ommelmateriaalia ei aiemmin ole tutkittu tai käytetty käden koukistajajännekorjauksessa. Tässä tutkimuksessa ommelmateriaalin nauhamainen rakenne paransi merkitsevästi jännekorjauksen vahvuutta, minkä arvioidaan johtuvan lisääntyneestä kontaktipinnasta jänteen ja ommelmateriaalin välillä estäen ompeleen läpileikkautumista jänteessä. Tutkimuksessa biohajoavasta PLDLA –materiaalista valmistetulla rakenteeltaan nauhamaisella kolmisäikeisellä langalla tehdyn jännekorjauksen vahvuus saavutti aktiivisen mobilisaation edellyttämän tason. Lisäksi uusi menetelmä on helppokäyttöinen ja sillä vältetään perinteisten monisäieompeleiden tekniseen suoritukseen liittyvät ongelmat.

Simulating and Forecasting the Demand for New Consumer Durables

A diffusion/replacement model for new consumer durables designed to be used as a long-term forecasting tool is developed. The model simulates new demand as well as replacement demand over time. The model is called DEMSIM and is built upon a counteractive adoption model specifying the basic forces affecting the adoption behaviour of individual consumers. These forces are the promoting forces and the resisting forces. The promoting forces are further divided into internal and external influences. These influences are operationalized within a multi-segmental diffusion model generating the adoption behaviour of the consumers in each segment as an expected value. This diffusion model is combined with a replacement model built upon the same segmental structure as the diffusion model. This model generates, in turn, the expected replacement behaviour in each segment. To be able to use DEMSIM as a forecasting tool in early stages of a diffusion process estimates of the model parameters are needed as soon as possible after product launch. However, traditional statistical techniques are not very helpful in estimating such parameters in early stages of a diffusion process. To enable early parameter calibration an optimization algorithm is developed by which the main parameters of the diffusion model can be estimated on the basis of very few sales observations. The optimization is carried out in iterative simulation runs. Empirical validations using the optimization algorithm reveal that the diffusion model performs well in early long-term sales forecasts, especially as it comes to the timing of future sales peaks.