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.

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.

Drops That Open Worlds : Image of Water in the Poetry of Euphrase Kezilahabi

Euphrase Kezilahabi on tansanialainen kirjailija, joka ensimmäisenä julkaisi swahilinkielisen vapaalla mitalla kirjoitetun runokokoelman. Perinteisessä swahilirunoudessa tiukat muotosäännöt ovat tärkeitä, ja teos synnytti kiivasta keskustelua. Runoteokset Kichomi ( Viilto , Kipu , 1974) ja Karibu Ndani ( Tervetuloa sisään , 1988) sekä Kezilahabin muu tuotanto voidaan nähdä uuden sukupolven taiteena. Kezilahabi on arvostettu runoilija, mutta hänen runojaan ei aiemmin ole käännetty englanniksi (yksittäisiä säkeitä lukuunottamatta), eikä juurikaan tutkittu yksityiskohtaisesti. Yleiskuvaan pyrkivissä lausunnoissa Kezilahabin runouden on hyvin usein määritelty olevan poliittista. Monet Kezilahabin runoista ottavatkin kantaa yhteiskunnallisiin kysymyksiin, mutta niiden pohdinta on kuitenkin runoissa vain yksi taso. Sen lisäksi Kezilahabin lyriikassa on paljon muuta ennen kartoittamatonta tämä tutkimus keskittyy veden kuvaan (the image of water). Kezilahabi vietti lapsuutensa saarella Victoria-järven keskellä, ja hänen vesikuvastonsa on rikasta. Tutkimuskysymyksenä on, mitä veden kuva runoteoksissa Kichomi ja Karibu Ndani esittää. Runojen analysoinnissa ja tulkinnassa on tarkasteltu myös sitä, miten äänteellinen taso osallistuu kuvien luomiseen. Tutkimuksen määritelmä kuvasta pohjautuu osittain Hugh Kennerin näkemykseen, jonka mukaan oleellista kuvassa on kirjaimellinen taso. Kennerin lähtökohtaan on yhdistetty John Shoptawin teoriaa, joka korostaa runon äänteellisen puolen tärkeyttä merkityksen muodostumisessa. Foneemien analyysissä vaikutteena on ollut Reuven Tsurin teoria. Analyysiosio osoittaa, että veden kuva edustaa ja käsittelee teoksissa lukuisia teemoja: elämää, kuolemaa, fyysistä vetovoimaa, runoutta, mielikuvitusta ja (ali)tajuntaa sekä moraalia. Veden kuvan tutkimuksen pohjalta on nähtävissä, että Kezilahabin filosofia asettuu elävä/kuollut- ja elämä/kuolema dikotomioiden ulkopuolelle.

Molecular genetics of primary open angle glaucoma and exfoliation syndrome

Glaucoma is the second leading cause of blindness worldwide. It is a group of optic neuropathies, characterized by progressive optic nerve degeneration, excavation of the optic disc due to apoptosis of retinal ganglion cells and corresponding visual field defects. Open angle glaucoma (OAG) is a subtype of glaucoma, classified according to the age of onset into juvenile and adult- forms with a cut-off point of 40 years of age. The prevalence of OAG is 1-2% of the population over 40 years and increases with age. During the last decade several candidate loci and three candidate genes, myocilin (MYOC), optineurin (OPTN) and WD40-repeat 36 (WDR36), for OAG have been identified. Exfoliation syndrome (XFS), age, elevated intraocular pressure and genetic predisposition are known risk factors for OAG. XFS is characterized by accumulation of grayish scales of fibrillogranular extracellular material in the anterior segment of the eye. XFS is overall the most common identifiable cause of glaucoma (exfoliation glaucoma, XFG). In the past year, three single nucleotide polymorphisms (SNPs) on the lysyl oxidase like 1 (LOXL1) gene have been associated with XFS and XFG in several populations. This thesis describes the first molecular genetic studies of OAG and XFS/XFG in the Finnish population. The role of the MYOC and OPTN genes and fourteen candidate loci was investigated in eight Finnish glaucoma families. Both candidate genes and loci were excluded in families, further confirming the heterogeneous nature of OAG. To investigate the genetic basis of glaucoma in a large Finnish family with juvenile and adult onset OAG, we analysed the MYOC gene in family members. Glaucoma associated mutation (Thr377Met) was identified in the MYOC gene segregating with the disease in the family. This finding has great significance for the family and encourages investigating the MYOC gene also in other Finnish OAG families. In order to identify the genetic susceptibility loci for XFS, we carried out a genome-wide scan in the extended Finnish XFS family. This scan produced promising candidate locus on chromosomal region 18q12.1-21.33 and several additional putative susceptibility loci for XFS. This locus on chromosome 18 provides a solid starting point for the fine-scale mapping studies, which are needed to identify variants conferring susceptibility to XFS in the region. A case-control and family-based association study and family-based linkage study was performed to evaluate whether SNPs in the LOXL1 gene contain a risk for XFS, XFG or POAG in the Finnish patients. A significant association between the LOXL1 gene SNPs and XFS and XFG was confirmed in the Finnish population. However, no association was detected with POAG. Probably also other genetic and environmental factors are involved in the pathogenesis of XFS and XFG.

Measuring and tracking quality factors in Free and Open Source Software projects

Free and Open Source Software (FOSS) has gained increased interest in the computer software industry, but assessing its quality remains a challenge. FOSS development is frequently carried out by globally distributed development teams, and all stages of development are publicly visible. Several product and process-level quality factors can be measured using the public data. This thesis presents a theoretical background for software quality and metrics and their application in a FOSS environment. Information available from FOSS projects in three information spaces are presented, and a quality model suitable for use in a FOSS context is constructed. The model includes both process and product quality metrics, and takes into account the tools and working methods commonly used in FOSS projects. A subset of the constructed quality model is applied to three FOSS projects, highlighting both theoretical and practical concerns in implementing automatic metric collection and analysis. The experiment shows that useful quality information can be extracted from the vast amount of data available. In particular, projects vary in their growth rate, complexity, modularity and team structure.

Free/Open Source Software Development : Results and Research Methods

Free and open source software development is an alternative to traditional software engineering as an approach to the development of complex software systems. It is a way of developing software based on geographically distributed teams of volunteers without apparent central plan or traditional mechanisms of coordination. The purpose of this thesis is to summarize the current knowledge about free and open source software development and explore the ways on which further understanding on it could be gained. The results of research on the field as well as the research methods are introduced and discussed. Also adapting software process metrics to the context of free and open source software development is illustrated and the possibilities to utilize them as tools to validate other research are discussed.

Tibetan Market Participation in China

Since the Chinese government began implementing economic reforms in the late 1970s, China has experienced profound economic change and growth. Like other parts of China, Tibetan areas of China have also experienced wide-ranging economic change with growth even higher than the China-wide average in certain years. Though China s strategic policy of developing the West provided many opportunities for economic and business activities, Tibetans have proven poorly equipped to respond to and take advantage of these opportunities. This study is about people, about market participation and specifically about why Tibetans do not effectively participate in the market in the context of China s economic development process. Many political, social, cultural and environmental factors explain the difficulties met by Tibetan communities. However, this study focuses on three factors: the social and culture context, government policy and education. The Buddhistic nature of Tibetan communities, particularly the political and economic system in traditional Tibetan society, explains this, especially after implementation of new national economic policies. An inclusive economic development policy that promotes local people s participation in the market demands serious consideration of local conditions. Unfortunately, such considerations often ignore local Tibetan realities. The economic development policy in Tibetan areas in China is nearly always an attempt to replicate the inland model and open up markets, even though economic and sociopolitical conditions in Tibet are markedly unlike much of China. A consequence of these policies is increasing numbers of non-Tibetan migrants flowing into Tibetan areas with the ensuing marginalization of Tibetans in the marketplace. Poor quality education is another factor contributing to Tibetan inability to effectively participate in the market. Vocational and business education targeting Tibetans is of very low quality and reflective of government failing to consider local circumstances when implementing education policy. The relatively few Tibetans who do receive education are nearly always unable to compete with non-Tibetan migrants in commercial activity. Encouraging and promoting Tibetan participation in business development and access to quality education are crucial for a sustainable and prosperous society in the long term. Particularly, a localized development policy that considers local environmental conditions and production as well as local culture is crucial. Tibet s economic development should be based on local environmental and production conditions, while utilizing Tibetan culture for the benefit of creating a sustainable economy. Such a localized approach best promotes Tibetan market participation. Keywords: Tibet cultural policy education market participation

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.