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.

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.

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.

From the river to the open sea - a critical life phase of young Atlantic salmon migrating from the Simojoki river

Long-term monitoring data collected from wild smolts of Atlantic salmon (Salmo salar) in the Simojoki river, northern Finland, were used in studying the relationships between the smolt size and age, smolt and postsmolt migration, environmental conditions and postsmolt survival. The onset of the smolt run was significantly dependent on the rising water temperature and decreasing discharge of the river in the spring. The mean length of smolts migrating early in the season was commonly higher and the mean age always older than among smolts migrating later. Many of the smolts migrating early in the season and almost all smolts migrating later had started their new growth in spring in the river before their sea entry. Among postsmolts, the time required for emigration from the estuary was dependent on the sea surface temperature (SST) off the river, being significantly shorter in years with warm than cold sea temperatures. After leaving the estuary, the postsmolts migrated southwards along the eastern coast of the northern Gulf of Bothnia, the geographical distribution of the tag recoveries coinciding with the warm thermal zone in spring in the coastal area. After arriving in the southern Gulf of Bothnia in late summer the postsmolts mostly migrated near the western coast, reaching the Baltic Main Basin in late autumn. Until the early 1990s there was only a weak positive association between smolt length and postsmolt survival. However, following a subsequent decrease in the mean smolt size, a significant positive dependence was observed between smolt size and the reported recapture rate of tagged salmon. The differences in recapture rates between smolts tagged during the first and second half of the annual migration season were insignificant, indicating that the seasonal variation in smolt size and age seem to be too small to affect survival. Among the climatic factors examined, the summer SST in the Gulf of Bothnia was most clearly related to the survival of the wild postsmolts. Postsmolt survival appeared to be highest in years when the SST in June in the Bothnian Bay varied between 9 and 12 ºC. In addition, the survival of wild postsmolts showed a significant positive dependence on the SST in July in the Bothnian Sea, but not on the abundance of the prey fish (0+ herring, Clupea harengus and sprat, Sprattus sprattus) in the Bothnian Sea and in the Baltic Main Basin. The results suggest, that if the incidence of extreme weather conditions were to increase due to climatic changes, it would probably reduce the postsmolt survival of wild salmon populations. For improving the performance of hatchery-reared smolts, it could be useful to examine opportunities to produce smolts that are in their smolt traits and abilities more similar to the wild smolts described in this thesis.

Open and closed boundaries in large-scale convective dynamos

Earlier work has suggested that large-scale dynamos can reach and maintain equipartition field strengths on a dynamical time scale only if magnetic helicity of the fluctuating field can be shed from the domain through open boundaries. To test this scenario in convection-driven dynamos by comparing results for open and closed boundary conditions. Three-dimensional numerical simulations of turbulent compressible convection with shear and rotation are used to study the effects of boundary conditions on the excitation and saturation level of large-scale dynamos. Open (vertical field) and closed (perfect conductor) boundary conditions are used for the magnetic field. The contours of shear are vertical, crossing the outer surface, and are thus ideally suited for driving a shear-induced magnetic helicity flux. We find that for given shear and rotation rate, the growth rate of the magnetic field is larger if open boundary conditions are used. The growth rate first increases for small magnetic Reynolds number, Rm, but then levels off at an approximately constant value for intermediate values of Rm. For large enough Rm, a small-scale dynamo is excited and the growth rate in this regime increases proportional to Rm^(1/2). In the nonlinear regime, the saturation level of the energy of the mean magnetic field is independent of Rm when open boundaries are used. In the case of perfect conductor boundaries, the saturation level first increases as a function of Rm, but then decreases proportional to Rm^(-1) for Rm > 30, indicative of catastrophic quenching. These results suggest that the shear-induced magnetic helicity flux is efficient in alleviating catastrophic quenching when open boundaries are used. The horizontally averaged mean field is still weakly decreasing as a function of Rm even for open boundaries.

The Open Access Scientific Journal: An Empirical Study

The open access (OA) model for journals is compared to the open source principle for computer software. Since the early 1990s nearly 1,000 OA scientific journals have emerged – mostly as voluntary community efforts, although recently some professionally operating publishers have used author charges or institutional membership. This study of OA journals without author charges shows that their impact is still relatively small, but awareness of it is increasing. The average number of research articles per year is lower than for major scientific journals but the publication times are shorter.

Finnish Short-Term Stock Returns

Functioning capital markets are a crucial part of a competitive economy since they provide the mechanisms to allocate resources. In order to be well functioning a capital market has to be efficient. Market efficiency is defined as a market where prices at any time fully reflect all available information. Basically, this means that abnormal returns cannot be predicted since they are dependent on future, presently unknown, information. The debate of market efficiency has been going on for several decades. Most academics today would probably agree that financial markets are reasonably efficient since virtually nobody has been able to achieve continuous abnormal positive returns. However, it is clear that a set of return anomalies exists, although they are apparently to small to enable substantial economic profit. Moreover, these anomalies can often be attributed to market design. The motivation for this work is to expand the knowledge of short-term trading patterns and to offer some explanations for these patterns. In the first essay the return pattern during the day is examined. On average stock prices move during two time periods of the day, namely, immediately after the opening and around the formal close of the market. Since stock prices, on average, move upwards these abnormal returns are generally positive and cause the distinct U-shape of intraday returns. In the second essay the results in the first essay are examined further. The return pattern around the former close is shown to partly be the result of manipulative action by market participants. In the third essay the focus is shifted towards trading patterns of the underlying stocks on days when index options and index futures on the stocks expire. Generally no expiration day effect was found. However, some indication of an expiration day effect was found when a large amount of open in- or at-the-money contracts existed. Also, the effects were likelier to be found for shares with high index-weight but fairly low trading volume. Last, in the forth essay the attention is turned to the behaviour of different tax clienteles around the dividend ex-day. Two groups of investors showed abnormal trading behaviour. Domestic non-financial investors, especially domestic companies, showed a dividend capturing behaviour, i.e. buying cum-dividend and selling ex-dividend shares. The opposite behaviour was found for foreign investors and domestic financial institutions. The effect was more notable for high yield, high volume stocks.

Non-small cell lung cancer : studies on pathogenesis, tumour targeting and treatment outcomes

Lung cancer accounts for more cancer-related deaths than any other cancer. In Finland, five-year survival ranges from 8% to 13%. The main risk factor for lung cancer is long-term cigarette smoking, but its carcinogenesis requires several other factors. The aim of the present study was to 1) evaluate post-operative quality of life, 2) compare clinical outcomes between minimally invasive and conventional open surgery, 3) evaluate the role of oxidative stress in the carcinogenesis of non-small lung cancer (NSCLC), and 4) to identify and characterise targeted agents for therapeutic and diagnostic use in surgery. For study I, pneumonectomy patients replied to 15D quality of life and baseline dyspnea questionnaires. Study III involved a prospective quality of life assessment using the 15D questionnaire after lobectomy or bi-lobectomy. Study IV was a retrospective comparison of clinical outcomes between 212 patients treated with open thoracotomy and 116 patients who underwent a minimally invasive technique. Study II measured parameters of oxidative metabolism (myeloperoxidase activity, glutathione content and NADPH oxidase activity) and DNA adducts. Study V employed the phage display method and identified a core motif for homing peptides. This method served in cell-binding, cell-localisation, and biodistribution studies. Following both pneumonectomy and lobectomy, NSCLC patients showed significantly decreased long-term quality of life. No significant correlation was noted between post-operative quality of life and pre-operative pulmonary function tests. Women suffered more from increased dyspnea after pneumonectomy which was absent after lobectomy or bi-lobectomy. Patients treated with video-assisted thoracoscopy showed significantly decreased morbidity and shorter periods of hospitalization than did open surgery patients. This improvement was achieved even though the VATS patients were older and suffered more comorbid conditions and poorer pulmonary function. No significant differences in survival were noted between these two groups. An increase in NADPH oxidase activity was noted in tumour samples of both adenocarcinoma and squamous cell carcinoma. This increase was independent from myeloperoxidase activity. Elevated glutathione content was noted in tumour tissue, especially in adenocarcinoma. After panning the clinical tumour samples with the phage display method, an amino acid sequence of ARRPKLD, the Thx, was chosen for further analysis. This method proved selective of tumour tissue in both in vitro and in vivo cell-binding assay, and biodistribution showed tumour accumulation. Because of the significantly reduced quality of life following pneumonectomy, other operative strategies should be implemented as an alternative (e.g. sleeve-lobectomy). To treat this disease, implementation of a minimally invasive surgical technique is safe, and the results showed decreased morbidity and a shorter period of hospitalisation than with thoracotomy. This technique may facilitate operative treatment of elderly patients with comorbid conditions who might otherwise be considered inoperable. Simultaneous exposure to oxidative stress and altered redox states indicates the important role of oxidative stress in the pathogenesis and malignant transformation of NSCLC. The studies showed with great specificity and with favourable biodistribution that Thx peptide is specific to NSCLC tumours. Thx thus shows promise in imaging, targeted therapy, and monitoring of treatment response.