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.

Seismic Tomography and Earthquake Mechanism Beneath the Central Fennoscandian Shield

The aim of this thesis was to study the seismic tomography structure of the earth s crust together with earthquake distribution and mechanism beneath the central Fennoscandian Shield, mainly in southern and central Finland. The earthquake foci and some fault plane solutions are correlated with 3-D images of the velocity tomography. The results are discussed in relation to the stress field of the Shield and with other geophysical, e.g. geomagnetic, gravimetric, tectonic, and anisotropy studies of the Shield. The earthquake data of the Fennoscandian Shield has been extracted from the Nordic earthquake parameter data base which was founded at the time of inception of the earthquake catalogue for northern Europe. Eight earlier earthquake source mechanisms are included in a pilot study on creating a novel technique for calculating an earthquake fault plane solution. Altogether, eleven source mechanisms of shallow, weak earthquakes are related in the 3-D tomography model to trace stresses of the crust in southern and central Finland. The earthquakes in the eastern part of the Fennoscandian Shield represent low-active, intraplate seismicity. Earthquake mechanisms with NW-SE oriented horizontal compression confirm that the dominant stress field originates from the ridge-push force in the North Atlantic Ocean. Earthquakes accumulate in coastal areas, in intersections of tectonic lineaments, in main fault zones or are bordered by fault lines. The majority of Fennoscandian earthquakes concentrate on the south-western Shield in southern Norway and Sweden. Onwards, epicentres spread via the ridge of the Shield along the west-coast of the Gulf of Bothnia northwards along the Tornio River - Finnmark fault system to the Barents Sea, and branch out north-eastwards via the Kuusamo region to the White Sea Kola Peninsula faults. The local seismic tomographic method was applied to find the terrane distribution within the central parts of the Shield the Svecofennian Orogen. From 300 local explosions a total of 19765 crustal Pg- and Sg-wave arrival times were inverted to create independent 3-D Vp and Vs tomographic models, from which the Vp/Vs ratio was calculated. The 3-D structure of the crust is presented as a P-wave and for the first time as an S-wave velocity model, and also as a Vp/Vs-ratio model of the SVEKALAPKO area that covers 700x800 km2 in southern and central Finland. Also, some P-wave Moho-reflection data was interpolated to image the relief of the crust-mantle boundary (i.e. Moho). In the tomography model, the seismic velocities vary smoothly. The lateral variations are larger for Vp (dVp =0.7 km/s) than for Vs (dVs =0.4 km/s). The Vp/Vs ratio varies spatially more distinctly than P- and S-wave velocities, usually from 1.70 to 1.74 in the upper crust and from 1.72 to 1.78 in the lower crust. Schist belts and their continuations at depth are associated with lower velocities and lower Vp/Vs ratios than in the granitoid areas. The tomography modelling suggests that the Svecofennian Orogen was accreted from crustal blocks ranging in size from 100x100 km2 to 200x200 km2 in cross-sectional area. The intervening sedimentary belts have ca. 0.2 km/s lower P- and S-wave velocities and ca. 0.04 lower Vp/Vs ratios. Thus, the tomographic model supports the concept that the thick Svecofennian crust was accreted from several crustal terranes, some hidden, and that the crust was later modified by intra- and underplating. In conclusion, as a novel approach the earthquake focal mechanism and focal depth distribution is discussed in relation to the 3-D tomography model. The schist belts and the transformation zones between the high- and low-velocity anomaly blocks are characterized by deeper earthquakes than the granitoid areas where shallow events dominate. Although only a few focal mechanisms were solved for southern Finland, there is a trend towards strike-slip and oblique strike-slip movements inside schist areas. The normal dip-slip type earthquakes are typical in the seismically active Kuusamo district in the NE edge of the SVEKALAPKO area, where the Archean crust is ca. 15-20 km thinner than the Proterozoic Svecofennian crust. Two near vertical dip-slip mechanism earthquakes occurred in the NE-SW junction between the Central Finland Granitoid Complex and the Vyborg rapakivi batholith, where high Vp/Vs-ratio deep-set intrusion splits the southern Finland schist belt into two parts in the tomography model.

European Union and the developing nations' external debt : EU-15's debt policy, 1960–2008

This Master's Thesis defines the debt policy of the current European Union Member States towards the developing nations. Since no official policy for debt exists in the EU, it is defined to include debt practices (loans and debt relief in development cooperation) and debt within the EU development policy framework. This study (1) describes how the issue of external debt appears in the development policy framework, (2) compares EU Member States' given loans and debt relief to grants for the developing nations (1960s to the 2000s), and (3) measures the current orientation in ODA of each EU Member State between grant aid and loan aid using the Grant-Loan Index (GLI). Theoretical aspects include reasons for selecting between loans (Bouchet 1987) and grants (Odedokun 2004, O'Brien and Williams 2007), policy context of the EU (Van Reisen 2007) and the meaning of external debt in the set-up between the North and the South. In terms of history, the events and impact of the colonial period (where loans have originated) are overviewed and compared in light of today's policies. Development assistance statistics are derived from the OECD DAC statistics portal and EU development policy framework documents from the EU portal. Methodologically, the structure of this study is from policy analysis (Barrien 1999, Hill 2008, Berndtson 2008), but it has been modified to fit the needs of studying a non-official policy. EU Member States are divided into three groups by Carbone (2007a), the Big-3, Northern and Southern donors, based on common development assistance characteristics. The Grant-Loan Index is used to compare Carbone's model, which measures quality of aid, to the GLI measuring the structure of aid. Results indicate that EU- 15 countries (active in debt practices) differ in terms of timing, stability and equality of debt practices in the long-term (1960s to the 2000s). In terms of current practices, (2000-2008), it is noted that there lies a disparity between the actual practices and the way in which external debt is represented in the development policy framework, although debt practices form a relevant portion of total ODA practices for many EU-15 Member States, the issue itself plays a minor role in development policy documents. Carbone’s group division applies well to the Grant – Loan Index’s results, indicating that countries with similar development policy behaviour have similarities in debt policy behaviour, with one exception: Greece. On the basis of this study, it is concluded that EU development policy framework content in terms of external debt and debt practices are not congruent. The understanding of this disparity between the policy outline and differences in long-term practices is relevant in both, reaching the UN’s Millennium Development Goals, and in the actual process of developing development aid.

Tax Reform and Payout Policy:Do Shareholder Clienteles or Payout Policy Adjust?

Changes in taxation of corporate dividends offer excellent opportunities to study dividend clientele effects. We explore payout policies and ownership structures around a major tax reform that took place in Finland in 2004. Consistent with dividend clienteles affecting firms’ dividend policy decisions, we find that Finnish firms altered their dividend policies based on the changed tax incentives of their largest shareholders. While firms adjust their payout policies, our results also indicate that ownership structures of Finnish firms also changed around the 2004 reform, consistent with shareholder clienteles adjusting to the new tax system.

Corporate Funding on the European Debt Capital Market

The integrated European debt capital market has undoubtedly broadened the possibilities for companies to access funding from the public and challenged investors to cope with an ever increasing complexity of its market participants. Well into the Euro-era, it is clear that the unified market has created potential for all involved parties, where investment opportunities are able to meet a supply of funds from a broad geographical area now summoned under a single currency. Europe’s traditionally heavy dependency on bank lending as a source of debt capital has thus been easing as corporate residents are able to tap into a deep and liquid capital market to satisfy their funding needs. As national barriers eroded with the inauguration of the Euro and interest rates for the EMU-members converged towards over-all lower yields, a new source of debt capital emerged to the vast majority of corporate residents under the new currency and gave an alternative to the traditionally more maturity-restricted bank debt. With increased sophistication came also an improved knowledge and understanding of the market and its participants. Further, investors became more willing to bear credit risk, which opened the market for firms of ever lower creditworthiness. In the process, the market as a whole saw a change in the profile of issuers, as non-financial firms increasingly sought their funding directly from the bond market. This thesis consists of three separate empirical studies on how corporates fund themselves on the European debt capital markets. The analysis focuses on a firm’s access to and behaviour on the capital market, subsequent the decision to raise capital through the issuance of arm’s length debt on the bond market. The specific areas considered are contributing to our knowledge in the fields of corporate finance and financial markets by considering explicitly firms’ primary market activities within the new market area. The first essay explores how reputation of an issuer affects its debt issuance. Essay two examines the choice of interest rate exposure on newly issued debt and the third and final essay explores pricing anomalies on corporate debt issues.

With Good Reputation Size Does not Matter: Issue Frequency and the Determinants of Debt Maturity

This paper examines empirically the effect firm reputation has on the determinants of debt maturity. Utilising data from European primary bond market between 1999 and 2005, I find that the maturity choice of issuers with a higher reputation is less sensitive to macroeconomic conditions, market credit risk-premiums, prevailing firm credit quality and size of the debt issue. The annualised coupon payments are shown to be a significant factor in determining the debt maturity and reveal a monotonously increasing relationship between credit quality and debt maturity once controlled for. Finally, I show that issuers lacking a credit rating have an implied credit quality positioned between investment-grade and speculative-grade debt.

Tax havens and their impacts on the non-haven countries

Tax havens have attracted increasing attention from the authorities of non-haven countries. The financial crisis exacerbates the negative attitude to tax havens. Offshore zones are now under strong pressure from the international, both financial and political institutions. Thus, the thesis will focus on the current problem of the modern economy, namely tax havens and their impact on the non-haven countries. This thesis will be based on the several articles, in particular “Tax Competition With Parasitic Tax Havens” by Joel Slemrod and John D. Wilson (University of Michigan, 2009) and “Do Havens Divert Economic Activity” by James R. Hines Jr., C. Fritz Foley and Mihir A. Desai (Ross School of Business, 2005). This paper provides two completely different and contradictory viewpoints on the problem of coexisting tax havens and non-haven countries. There are two models, examined in this work, present two important researches. The first one will be concentrated on the positive effect from tax havens whereas the last model will be focused on the completely negative effect from offshore jurisdictions. The first model gives us a good explanation and proof of its statement why tax havens can positively influence on nearby high-tax countries. It describes that the existence of offshore jurisdictions can stimulate the growth of operations and facilitates economic activity in non-haven countries. In contrast to above mentioned, the model with quite opposite view was presented. This economic model and its analysis confirms the undesirability of the existence of offshore areas. Taking into consideration, that the jurisdictions choose their optimal policy, the elimination of offshores will have positive impact on the rest of countries. The model proofs the statement that full or partial elimination of tax havens raises the equilibrium level of the public good and increases country welfare. According to the following study, it can be concluded that both of the models provide telling arguments to prove their assertions. Thereby both of these points of view have their right to exist. Nevertheless, the ongoing debate concerning this issue still will raise a lot of questions.