Browsing by discipline "Nationalekonomi"

I have introduced the notion of absorptive capacity into an innovation-driven growth model. The model features firms with heterogeneous size and innovation capability. The economy`s aggregate output growth rate is driven by the growth of the productivity index of firm`s intermediate goods. There are firms already operating at least one active product line and potential entrants not owning a product line, but engaged in research in order to innovate and enter the economy. Each firm engages in R&D activities to improve upon existing intermediate good or to discover a completely new one. An incumbent firm may exit the economy exogenously and more importantly endogenously due to creative destruction or due to obsolescence. The consideration of the firm`sabsorptive capacity in Cohen and Levinthal`s sense shaped the specifications of the innovation production functions for entrants and incumbents. I have set a proxy for the firm`s absorptive capacity that considers the quality level of active product lines owned by the firm, their number and their closeness. Then, incumbent firm`s absorptive capacity confers to the it an innovation efficiency advantage compared to potential entrant, in improving upon its own product lines or in innovating in a product line not existing in its portfolio. For potential entrants, the average quality level of intermediate good in the economy acts as an extra difficulty they must overcome since the did not participate in building that economy`s average level of quality, and lack then the absorptive capacity that an average incumbent firm in the economy would possess. Although the general structure of the equilibrium growth rate obtained is the same as in the basis model (Acemoglu et al. 2013), however, the content of incumbents` rate of innovation and the rate of entry for potential entrants is different and more likely to deliver different values in equilibrium. This framework may be useful in studying empirically the effects of R&D subsidies on economic growth and lead to different results obtained by the main reference article, that found that subsidies to incumbents`R&D are pervasive for the growth of the economy.

An extensive electricity transmission network facilitates electricity trading between Finland, Sweden, Norway and Denmark. Currently most of the areas power generation is traded at NordPool, where the trading volumes have steadily increased since the early 1990s, when the exchange was founded. The Nordic electricity is expected to follow the current trend and further integrate with the other European electricity markets. Hydro power is the source for roughly a half of the supply in the Nordic electricity market and most of the hydro is generated in Norway. The dominating role of hydro power distinguishes the Nordic electricity market from most of the other market places. Production of hydro power varies mainly due to hydro reservoirs and demand for electricity. Hydro reservoirs are affected by water inflows that differ each year. The hydro reservoirs explain remarkably the behaviour of the Nordic electricity markets. Therefore among others, Kauppi and Liski (2008) have developed a model that analyzes the behaviour of the markets using hydro reservoirs as explanatory factors. Their model includes, for example, welfare loss due to socially suboptimal hydro reservoir usage, socially optimal electricity price, hydro reservoir storage and thermal reservoir storage; that are referred as outcomes. However, the model does not explain the real market condition but rather an ideal situation. In the model the market is controlled by one agent, i.e. one agent controls all the power generation reserves; it is referred to as a socially optimal strategy. Article by Kauppi and Liski (2008) includes an assumption where an individual agent has a certain fraction of market power, e.g. 20 % or 30 %. In order to maintain the focus of this thesis, this part of their paper is omitted. The goal of this thesis is two-fold. Firstly we expand the results from the socially optimal strategy for years 2006-08, as the earlier study finishes in 2005. The second objective is to improve on the methods from the previous study. This thesis results several outcomes (SPOT-price and welfare loss, etc.) due to socially optimal actions. Welfare loss is interesting as it describes the inefficiency of the market. SPOT-price is an important output for the market participants as it often has an effect on end users electricity bills. Another function is to modify and try to improve the model by means of using more accurate input data, e.g. by considering pollution trade rights effect on input data. After modifications to the model, new welfare losses are calculated and compared with the same results before the modifications. The hydro reservoir has the higher explanatory significance in the model followed by thermal power. In Nordic markets, thermal power reserves are mostly nuclear power and other thermal sources (coal, natural gas, oil, peat). It can be argued that hydro and thermal reservoirs determine electricity supply. Roughly speaking, the model takes into account electricity demand and supply, and several parameters related to them (water inflow, oil price, etc.), yielding finally the socially optimal outcomes. The author of this thesis is not aware of any similar model being tested before. There have been some other studies that are close to the Kauppi and Liski (2008) model, but those have a somewhat different focus. For example, a specific feature in the model is the focus on long-run capacity usage that differs from the previous studies on short-run market power. The closest study to the model is from Californias wholesale electricity markets that, however, uses different methodology. Work is constructed as follows.

This thesis examines the potential fungibility of foreign assistance to the Government of Nepal using two methods: an econometric model and a modified ORANI-G, a Computable General Equilibrium (CGE) model. I use the econometric model to corroborate the findings of the CGE model and to determine whether such a model can produce credible empirical evidence on aid fungibility. Both models indicate presence of general and categorical fungibility, and non-additionality in the use of aid in Nepal. I begin with a partial equilibrium econometric model to estimate government expenditures using a Seemingly Unrelated Regression (SUR). At the sectoral level, categorical aid is prone to reshuffling generating overall negative development investments in most of the sectors. At the aggregate level, a unit of aid produces a meagre 0.33 units of additional development expenditures in the Nepalese government budget. In addition, aid partially finances non-development expenditures, but only slightly enhances the governments’ own revenue effort. Next, I utilize the ORANI-G model with a Klein-Rubin functional form for government behaviour, rigidities in the labour market, and some additional parameters to study aid fungibility in Nepal. This produces results that are analogous to the econometric model. Foreign assistance to Nepal exhibits a high level of general and categorical fungibility, with an insignificant increase in revenue collection. Overall, a unit of aid stimulates only a 0.45 units of additional development expenditures in the Nepalese government budget. In using the CGE model to study fungibility, this thesis develops a new method of analyzing the research question whereas, previous studies use models in a partial equilibrium setting, failing to account for decision-making processes of the government. This thesis is an attempt to expand on the existing literature by introducing CGE models in the study of aid fungibility and to motivate further study into fungibility using CGE modelling.

A model is been built where two countries compete for a multinational enterprise’s (MNE’s) foreign direct investment (FDI) provided that its arrival will increase the host country’s social welfare. Both potential host countries have unionised labour markets where monopoly labour unions determine the level of the wage setting to be either decentralised, intermediate level, or centralised. The governments may influence the unions’ decision by setting a lump-sum tax on them. Both countries have two sectors, a non-sheltered and sheltered sector. The MNE will enter in the non-sheltered sector and is assumed to be more productive than the incumbent firms there. Product market competition between the MNE and domestic incumbent firms is ruled out to isolate the effect of product market competition from the effect of pure wage compression. The game evolves in five stages: (1) the governments set taxes, (2) the monopoly unions choose the level of the wage setting, (3) the MNE chooses its investment location, (4) the monopoly unions set wages, and (5) the firms set output. The purpose of the model is to learn whether the degree of centralisation of wage setting can be used as a strategic choice to attract foreign direct investment. The main results of the paper are the following. It was found that the MNE’s (incumbent unions’) most preferred choice is always centralised (decentralised) wage setting. It was shown that the governments’ most preferred choice is either decentralised or centralised wage setting – depending on the relative sizes of the two sectors. If the social welfare in country 1 is the highest under decentralised wage setting, then the optimal policy of government 1 is to set zero income taxes. If the social welfare in country 2 is the highest under centralised wage setting, then the optimal policy of government 2 is to set positive taxes slightly over that required to make the domestic incumbent labour unions prefer centralised wage setting. Given this, the MNE will always invest in country 2. The exact expressions for the stage-contingent lump-sum taxes were derived. To my best knowledge, this is a novel contribution that cannot be found elsewhere.

The cross-country co-movements of economic variables have been documented in the macroeconomic research. This phenomenon has puzzled researchers in the field of dynamic stochastic general equilibrium (DSGE) models because the early DSGE models have had challenges in replicating the co-movements of outputs. The thesis approaches the cross-country co-movements of output cycles in DSGE models by introducing correlation to technology shocks. The objective is to study if the correlation in the technology shocks enhances the model's ability to capture the cross-country correlations of empirical data. The thesis presents a two-country DSGE model that is constructed using the results of Galí and Monacelli (2005). The original model of Galí and Monacelli is a small-country model, and in the thesis it is demonstrated how the model is re-constructed as consisting of two large economic regions. Another important modification to the original model is that the thesis presents a distinctive shock process that allows the technology shocks to correlate. This is done by adding a foreign technology shock variable to the domestic technology shock process. The final model is presented as a system of thirteen equations and, as a solution to the system, the dynamics of the model are observed. The results from the model show that the two-country model with correlated shock processes is able to replicate the cross-country correlations of empirical data well. This result is compared to the benchmark model with no shock correlations and the comparison reveals that although the benchmark model succeeds in replicating the cross-country correlations between inflations and nominal interest rates, it does not produce as high output gap correlation as the model with correlated shock processes. The difference between these models is caused by the distinctive shock processes. The technology shocks affect directly the potential output and the real output adjusts slowly as a response to the changes in the expectations. This causes the dynamics in the output cycle. The results of the thesis show evidence that introducing correlation between country-specific technology shocks can enhance the models ability to produce realistic cross-country output co-movements. This result should apply to other models that follow the framework of Galí and Monacelli. The generalization of the results could still be studied further. In addition, including new features to the model would allow for examination of wider variety of shocks.

Ever since its initial introduction some fifty years ago, the rational expectations paradigm has dominated the way economic theory handles uncertainty. The main assertion made by John F. Muth (1961), seen by many as the father of the paradigm, is that expectations of rational economic agents should essentially be equal to the predictions of relevant economic theory, since rational agents should use information available to them in an optimal way. This assumption often has important consequences on the results and interpretations of the models where it is applied. Although the rational expectations assumption can be applied to virtually any economic theory, the focus in this thesis is on macroeconomic theories of consumption, especially the Rational Expectations–Permanent Income Hypothesis proposed by Robert E. Hall in 1978. The much-debated theory suggests that, assuming that agents have rational expectations on their future income, consumption decisions should follow a random walk, and the best forecast of future consumption level is the current consumption level. Then, changes in consumption are unforecastable. This thesis constructs an empirical test for the Rational Expectations–Permanent Income Hypothesis using Finnish Consumer Survey data as well as various Finnish macroeconomic data. The data sample covers the years 1995–2010. Consumer survey data may be interpreted to directly represent household expectations, which makes it an interesting tool for this particular test. The variable to be predicted is the growth of total household consumption expenditure. The main empirical result is that the Consumer Confidence Index (CCI), a balance figure computed from the most important consumer survey responses, does have statistically significant predictive power over the change in total consumption expenditure. The history of consumption expenditure growth itself, however, fails to predict its own future values. This indicates that the CCI contains some information that the history of consumption decisions does not, and that the consumption decisions are not optimal in the theoretical context. However, when conditioned on various macroeconomic variables, the CCI loses its predictive ability. This finding suggests that the index is merely a (partial) summary of macroeconomic information, and does not contain any significant private information on consumption intentions of households not directly deductible from the objective economic variables. In conclusion, the Rational Expectations–Permanent Income Hypothesis is strongly rejected by the empirical results in this thesis. This result is in accordance with most earlier studies conducted on the topic.

The largest party holds more than half of the seats in every third Finnish local council and, thus, is likely to govern alone. It is namely the absolute majority that makes the decisions. In this study, I investigate, if single-party and coalition governed municipalities differ in economic outcomes. Theoretical considerations often rely on so-called common pool problem. Common pool models suggest that when there is a governing coalition, all parties want to target some spending to their core constituents, while costs are shared equally across all parties. This results in higher spending than in the case that one party would be governing. However, also contradictory arguments have been proposed. It has been suggested that, for instance, strategic use of debt or role of swing voters in elections could lead to higher spending under single-party government. In this study, I show evidence from Finnish municipalities that is consistent with the idea of common pool models. Following the recent development lines in empirical political economics, I exploit close elections as a source of exogenous variation using regression discontinuity design (RDD) adjusted to proportional system. It is assumed that close elections are as good as if they were random. Estimates suggest that single-party control decreases, on average, total expenditures and revenues by around 200 euros per capita. However, it seems that the effect gets smaller year by year. It could be that re-electoral incentives affect the behavior of parties that govern councils alone. I also analyze the effect in several areas of spending and revenues. The data set that I use in this study includes data from 445 municipalities for a varying number of years between 1980–2010, which makes 13,104 observations in total. These data cover results of 3,778 elections. This study develops a simple though new way of analyzing the research question. I use seat division rules to compute the running variable for the regression discontinuity design. Moreover, most previous studies on the topic compare outcomes in different countries. In this study, the outcomes are compared within the same system, i.e. all units share the same institutional background. Last, the topic has not been studied in the Finnish context before, even though single-party control is common phenomenon and municipalities have an important role in the Finnish system.

In recent years, thanks to developments in information technology, large-dimensional datasets have been increasingly available. Researchers now have access to thousands of economic series and the information contained in them can be used to create accurate forecasts and to test economic theories. To exploit this large amount of information, researchers and policymakers need an appropriate econometric model.Usual time series models, vector autoregression for example, cannot incorporate more than a few variables. There are two ways to solve this problem: use variable selection procedures or gather the information contained in the series to create an index model. This thesis focuses on one of the most widespread index model, the dynamic factor model (the theory behind this model, based on previous literature, is the core of the first part of this study), and its use in forecasting Finnish macroeconomic indicators (which is the focus of the second part of the thesis). In particular, I forecast economic activity indicators (e.g. GDP) and price indicators (e.g. consumer price index), from 3 large Finnish datasets. The first dataset contains a large series of aggregated data obtained from the Statistics Finland database. The second dataset is composed by economic indicators from Bank of Finland. The last dataset is formed by disaggregated data from Statistic Finland, which I call micro dataset. The forecasts are computed following a two steps procedure: in the first step I estimate a set of common factors from the original dataset. The second step consists in formulating forecasting equations including the factors extracted previously. The predictions are evaluated using relative mean squared forecast error, where the benchmark model is a univariate autoregressive model. The results are dataset-dependent. The forecasts based on factor models are very accurate for the first dataset (the Statistics Finland one), while they are considerably worse for the Bank of Finland dataset. The forecasts derived from the micro dataset are still good, but less accurate than the ones obtained in the first case. This work leads to multiple research developments. The results here obtained can be replicated for longer datasets. The non-aggregated data can be represented in an even more disaggregated form (firm level). Finally, the use of the micro data, one of the major contributions of this thesis, can be useful in the imputation of missing values and the creation of flash estimates of macroeconomic indicator (nowcasting).

The thesis examines the effects of tax progressivity on the stability of a growing economy. This is done based on the AK growth model. My interest in this topic regarding progressive taxation comes from two articles by Shu-Hua Chen and Jang-Ting Guo, published in 2013 and 2016. The articles do not include detailed mathematical proofs contrary to my thesis. The contribution of my paper is therefore the complete mathematical proofs. In this way I show that the conclusions of the papers really are based on mathematical facts, therefore increasing the value of the results. Two different externalities in the production structure are considered. Either the government expenditures are productive, contributing positively to the level of production, or there are productivity spillovers with the level of production depending on the average size of the capital stock as different producers may use different amounts of capital. In the presence of productive government expenditures, the effects of progressivity depend on the degree to which the expenditures impact the demand as well as the supply of the final good. If the government expenditures affect the supply of goods more than the demand, a sharp progressivity of taxation, as well as any degree of regressive taxation, creates instability in the economy. On the other hand, a moderate progressivity creates stability in the economy. However, if the government expenditures affect the demand of goods more than the supply, any degree of progressivity creates instability in the economy and any degree of regressivity creates stability. In the presence of productivity spillovers, any degree of progressive taxation results in an unstable economic development. However, any degree of regressive taxation results in a stable economy. Finally, regardless of type of production externality, a proportional taxation results in a stable economy and a stable growth path.

Conducted research on the relationships between oil shocks and macroeconomic variables has evolved a lot over the past years. Developed empirical and theoretical models triggered the need to recall different types of shocks and its effect on certain macroeconomic variables. In this thesis, Structural Vector Autoregressive Model (SVAR) has been used in order to analyse the extent to which crude oil supply, aggregate oil demand and oil market-specific demand shocks can affect GDP growth rate, consumer price index and short-term interest rates of analysed oil-exporting countries: Norway and United Kingdom and oil-importing ones: Germany and USA. The results have shown that the strength of the oil market-specific demand shock is the strongest among the rest of the shocks analysed. There is observed a clear positive effect for oil-exporting countries and negative impact for oil-importing ones. However, when analysing crude oil supply and aggregate demand shocks of oil-exporting countries, I have found out that the direction of the shock depends on the extend of the disruptions either from supply or demand side. Oil-dependency in the industrial structure of the oil-importing economies is also a significant factor affecting the vulnerability of the country and explosiveness to any shock. Also, I have discovered that short-term interest rates tend to fluctuate in the same direction as the inflation when oil production levels are changing. In addition, the direction of the effect depends on the monetary authorities' targets and policies implemented. These vary with no regard whether the country is oil-importing or oil-exporting.