Browsing by Subject "econometrics"

This thesis researches empirically, whether variables that are able to reliably predict Finnish economic activity can be found. The aim of this thesis is to find and combine several variables with predictive ability into a composite leading indicator of the Finnish economy. The target variable it attempts to predict, and thus the measure of the business cycle used, is Finnish industrial production growth. Different economic theories suggest several potential predictor variables in categories, such as consumption data, data on orders in industry, survey data, interest rates and stock price indices. Reviewing a large amount of empirical literature on economic forecasting, it is found that particularly interest rate spreads, such as the term spread on government bonds, have been useful predictors of future economic growth. However, the literature surveyed suggests that the variables found to be good predictors seem to differ depending on the economy being forecast, the model used and the forecast horizon. Based on the literature reviewed, a pool of over a hundred candidate variables is gathered. A procedure, involving both in-sample and pseudo out-of-sample forecast methods, is then developed to find the variables with the best predictive ability from this set. This procedure yields a composite leading indicator of the Finnish economy comprising of seven component series. These series are very much in line with the types of variables found useful in previous empirical research. When using the developed composite leading indicator to forecast in a sample from 2007 to 2009, a time span including the latest recession, its forecasting ability is far poorer. The same occurs when forecasting a real-time data set. It would seem, however, that individual very large forecast errors are the main reason for the poor performance of the composite leading indicator in these forecast exercises. The findings in this thesis suggest several developments to the methods adopted in order to produce more accurate forecasts. Other intriguing topics for further research are also explored.

The goal of this thesis is to analyse what are the effects of the monetary policy conducted by the European Central Bank (ECB) on Finnish macroeconomy and how persistent those effects are. The thesis assumes that because Finland contributes only a very small fraction of the economic output of the euro area, the overall economic situation of Finland does not matter from the point of view of ECB when setting the monetary policy stand for the monetary union. Based on the notation that the ECB’s monetary policy can be considered exogenous, the effects of monetary policy are estimated in the thesis by Ordinary Least Squares (OLS), while using macroeconomic variables in euro area as covariates. By including the variables that express the overall economic status of the euro area, the analysis attempts to remove the systematic part of the monetary policy when estimating the effects of monetary policy. The data used for the modelling consists of main macroeconomic variables in euro area and Finland between 1999 and 2023. These are unemployment, industrial output, inflation and the short interest rate. The interest rate variable consists of two elements. Because for a timespan of several years interest rates were stuck at zero a shadow rate is used to represent the monetary policy stand of the central bank. During the time when the zero lower bound was not binding, 1-month Euribor is used as the interest rate variable. The modelling results are quite well in line with common understanding about the nature of the monetary policy and its effects on real economy. Increase in interest rates results in increase in unemployment, fall in industrial output and decrease in inflation. There were however some uncertainties with the results when considering higher confidence levels. Overall, the results of the thesis seem to be coherent with commonly hold views about the effects of the monetary policy. The chosen empirical approach seems to yield similar results as more commonly used SVAR and DGSE models. The conclusion of thesis is that the monetary policy does impact the real economic activity as is expected.