Browsing by discipline "Economics"

The most recent Global recession forced several central banks to lower their short term nominal interest rates to zero. The monetary policy is faced with the zero lower bound where the interest rates cannot be further decreased. In this situation, the monetary policy is impotent to stimulate the economy. The fiscal policy has become more important in context of Global recession. The persistent effects of the Global recession can be partly explained with a debt overhang. The Global recession was preceded with a period of debt leveraging and followed with a period of reducing the amount of debt in the economy. This process of debt reduction is called deleveraging. The aim of this thesis is to analyse the fiscal policy effectiveness in liquidity trap that is induced by deleveraging. This thesis analyses the effects that an expansion in government purchases has on output in liquidity trap economy. This analysis can be interpreted as an evaluation on the effectiveness of fiscal policy to stimulate the economy. This thesis is going to study the size of this effect with government spending multiplier. This thesis is partly conducted as literature review. Firstly, this thesis analyses the size of the government spending multiplier in different models and under different economic assumptions. Secondly, this paper presents a model that is based on a specific paper. Based on the paper in question, this thesis discusses the effectiveness of fiscal stimulus in deleveraging induced liquidity trap environment. Based on the specific model, this thesis presents the factors affecting the size of its government spending. From my own analysis on this specific model, I find additional factors that affect the government spending multiplier. The specific model used in this thesis relies on a heterogenous household framework with sticky prices. The model economy is faced with a shock that reduces the debt limit. This limit controls the amount of borrowing in the economy. There are two types of households in this model. The patient households smooth their consumption over the periods and the more impatient households consume their entire income and borrow up to the debt limit. The shock forces more impatient households to pay back their debt and lower their consumption. The central bank can stimulate the demand of the patient households if the nominal interest rates are positive. If the shock is large enough the nominal interest rates cannot compensate the decreased demand. When the nominal interest rates are in the lower bound, the economy is in liquidity trap. The liquidity trap can be characterized as zero lower bound equilibrium with decreased output and negative inflation. Based on this specific model, this paper finds that when the monetary policy in constrained by the zero lower bound on nominal interest rates the effectiveness of fiscal policy will be increased. Furthermore based on the same model, this thesis finds that the fiscal policy is more effective in liquidity trap when part of the households is constrained by the borrowing and liquidity constraints. This paper argues that the government spending increase is an effective tool to stimulate economy in liquidity trap that is a result of a large enough deleveraging shock. In this thesis, the effectiveness of fiscal stimulus in liquidity trap is analysed with log-linearised model. Based on literature review this thesis discusses that even though the linearisation simplifies the model analysation it can also produce misleading policy implications. Therefore, the implications of the used linearisation method can be argued to produce too optimistic views on government spending multiplier.

Starting from the beginning of 1990s, Finland has experienced rapid growth rates in population fractions of non-native residents, with almost half of all immigrants eventually settling in Helsinki metropolitan area. This thesis studies immigrant settlement patterns in the capital region, with the purpose of reliably quantifying and documenting dynamics of ethnic residential segregation. Formation of 'ethnic enclaves' is a widely-debated issue which might have ambiguous impact on immigrants’ economic and social outcomes. Robust inference on segregation dynamics is a prerequisite for furthering understanding of the issue. However, qualitative inference on segregation dynamics is often hindered by the fact that different spatial unit sizes and/or immigrant population fractions generate random segregation of varying magnitudes. This thesis overcomes the problem by employing index of systematic segregation which is expressed as a fraction of maximum excess dissimilarity (net of random) that could possibly occur. Index of dissimilarity (Duncan index) is chosen as a baseline measure for calculating systematic index, ensuring comparability of my research to the existing body of knowledge on the phenomenon. While index of dissimilarity reports only marginal growth in segregation, systematic measure reports almost two-fold increase in ethnic residential segregation. Employing systematic index allows reliable comparison of segregation across various immigrant groups and localities. Thus, I find that immigrants from Balkan and African countries are more segregated than other foreign-born individuals. Comparison of systematic indices across largest Finnish cities reveals that Turku has been substantially more segregated than its counterparts starting from year 1995. Eventually, I isolate the measure of segregation along ethnic lines from sorting along other dimensions, such as income. I find no evidence that increase in residential segregation is driven by widening income gap between native and immigrant population. Finally, all the findings are presented compactly in two web applications, allowing flexible controls over the choice of locality of interest, immigrant group, statistics and map-types.

Globaalin näkökulmansa ansiosta kulutuslähtöiset kasvihuonekaasupäästöt ovat enenevästi esillä ilmastonmuutokseen hillintään tähtäävissä toimenpiteissä ja päästövähennystavoitteissa.Kulutuslähtöisyydellä tarkoitetaan kaikkien tuotteiden ja palveluiden sisältämien kasvihuonekaasujen allokoimista loppukuluttajille. Kulutuslähtöisyys on yksi syy siihen, että keskustelu kaupunkien roolista ilmastonmuutoksessa on viime vuosina käynyt kuumana. Tiheän kaupunkirakenteen ja pienempien liikkumisen päästöjen suhde on osoitettu lukuisissa tutkimuksissa, mutta toisaalta on myös esitetty, että kaupunkilaiset kulutustottumukset kumoaisivat osan kaupunkilaisuuden ekotehokkuudesta. Tutkielmassa koottiin yhteen tutkimuksia kotitalouksien ja kaupunkilaisuuden ympäristövaikutuksista. Mikroekonometrisessä osiossa laskettiin Suomen kansantaloudelle kehitetyn ympäristölaajennetun panos-tuotosmallin ja kulutustutkimusaineiston avulla kulutuslähtöisiä kasvihuonekaasupäästöjä eli hiilijalanjälkiä. Hiilijalanjäljet disaggregoitiin yksityisen liikkumisen ja asumisen energian suoriin päästöihin ja muuhun kulutukseen sitoutuneisiin epäsuoriin päästöihin. Laskettuja hiilijalanjälkiä analysoitiin asetelmaperustaisen regressioanalyysiin keinoin. Tutkimustulokset paljastavat, että aluetyyppejä vertailtaessa pääkaupunkiseudun asukkaiden hiilijalanjäljet ovat kulutusmenoja kontrolloitaessa noin 30 % pienempiä kuin maalaismaisissa kunnissa asuvien. Toisaalta erot jalanjälkien keskiarvoissa pääkaupunkiseudulla ja kaupungeissa asuvien hyväksi ovat varsin maltillisia. Tutkielmassa havaitaan myös, että kaupunkilaisuus vähentää eniten yksityisautoilun ja energiankulutuksen päästöjä. Kaupunkilaisuuden edut ovat maltillisempia silloin kun kulutukseen sitoutuneita epäsuoria päästöjä tarkastellaan erikseen. Tulokset antavat viitteitä siitä, että pääkaupunkiseudulla ja kaupunkimaisissa kunnissa asuvien tavaroihin ja palveluihin kohdistuvan kulutuksen rakenne on kasvihuonekaasuintensiivisempi kuin taajaan asutuissa tai maalaismaisissa kunnissa asuvien. Tutkielmassa havaitaan, että vaikka asuinpaikka vaikuttaa hiilijalanjälkiin, on korkea kulutusmenojen taso merkittävin korkeisiin kasvihuonekaasupäästöihin johtava tekijä. Koska tutkielmassa ei löydetä viitteitä kotitaloustason ympäristötaloudellisen Kuznets-käyrän irtikytkeytymishypoteesin puolesta, vaikuttaa tutkimustulosten valossa ilmeiseltä, että ilmastonmuutoksen hillitsemiseksi muutokset myös yksityisessä kulutuksessa ovat välttämättömiä.

Perinteisissä tavoissa mallintaa dynaamista valintaa on merkittäviä puutteita; eksponentiaaliseen diskonttaukseen perustuvat mallit ovat huonosti sopusoinnussa empiiristen havaintojen kanssa, hyperbolisen diskonttauksen malleilta puolestaan puuttuu psykologinen pohja, ja ne soveltuvat dynaamisen epäjohdonmukaisuuden takia huonosti hyvinvointianalyysin perustaksi. Päätöksentekijän sisäisen konfliktin lähtökohdakseen ottavat monipersoonaiset mallit kärsivät puutteellisesta formalisoinnista, lievästä psykologisesta epätarkkuudesta sekä kyvyttömyydestä tuottaa testattavia ennusteita käyttäytymiselle. Faruk Gulin ja Wolfgang Pesendorferin kaksivaiheinen malli, jossa päätöksentekijä valitsee ensimmäisessä vaiheessa vaihtoehtojoukon ja toisessa vaiheessa tästä joukosta kulutusvaihtoehdon, mahdollistaa päätöksentekijän kokemien houkutusten eksplisiittisen mallintamisen. Tämä johtaa psykologisesti tarkempaan malliin, jossa päätöksentekijä pystyy paitsi sitoutumaan ennakolta myös kulutusajanhetkellä vastustamaan houkutuksia harjoittamalla itsekuria. Vaikka päätöksentekijä harjoittaisikin onnistuneesti itsekuria, hän saattaa silti haluta myös sitoutua suppeampaan valintajoukkoon, koska itsekurin harjoittamisesta aiheutuu kustannuksia. Niiden seurauksena päätöksentekijä valitsee vaihtoehdon, joka on kompromissi normatiivisesta hyvyydestä ja houkuttelevuudesta. Mallissa siis sitoutumisen halun syynä ovat preferenssien muuttumisen sijaan päätöksentekijän tulevaisuudessa kokemat houkutukset. Tarkastelemalla toisen vaiheen preferenssejä riittävän laajassa joukossa päätöksentekijä saadaan mallinnettua dynaamisesti johdonmukaisena, mikä mahdollistaa yksiselitteisen hyvinvointivaikutusten arvioinnin. Mallilla osoitetaan myös olevan peliteoriaan perustuva yhteys monipersoonaisiin malleihin. Gulin ja Pesendorferin malli on kuitenkin vain lähtökohta, jossa on useita yksinkertaistuksia. Eräs sellainen on, että päätöksentekijä kärsii vain yhdestä houkutuksesta kerrallaan, ja vaihtoehtojoukko vaikuttaaa hänen valintaansa vain houkuttelevimman vaihtoehdon kautta. Lisäksi päätöksentekijä tietää, minkä laatuisista ja kuinka voimakkaista houkutuksista tulee tulevaisuudessa kärsimään. Näiden ominaisuuksien seurauksena päätöksentekijän toisen vaiheen valintakäyttäytyminen on riittävän säännönmukaista toteuttaakseen paljastettujen preferenssien heikon aksiooman. Perusmallille esitetäänkin laajennuksia, jotka heikentävät oletuksia mahdollistaen vähemmän säännönmukaisen käyttäytymisen. Näihin laajennuksiin kuuluu vaihtoehtojoukosta riippuvan itsekurin malli, jossa kyky harjoittaa itsekuria heikkenee voimakkaampien houkutusten läsnäollessa. Tällä mallilla pystytään selittämään Allaisn paradoksin tyyppistä käyttäytymistä. Toinen laajennus käsittelee tilannetta, jossa päätöksentekijä ei tiedä, mitä houkutuksia tulevaisuudessa kokee tai kuinka voimakkaita nämä ovat. Malli mahdollistaa myös useamman samanaikaisen houkutuksen kokemisen. Lisäksi esitetään kaksivaiheisen mallin laajennus äärettömän monen periodin tilanteeseen, jolloin mallin sovellettavuus paranee. Esimerkki näiden sovellusten tuloksista on se, että houkutuksista kärsivien päätöksentekijöiden käyttäminen kilpailullisissa yleisen tasapainon malleissa saattaa tuottaa tasapainoja, jotka eivät ole Pareto-tehokkaita. Lopuksi kehotetaan jatkamaan tutkimussuunnan kehittämistä tarkastelemalla useita samanaikaisia psykologisia ilmiöitä yhdessä houkutusten kanssa sekä monipuolistamaan itsekurin harjoittamisen kyvyn riippuvuutta valintajoukosta. Näin voitaisiin mahdollisesti lisätä ymmärrystä muun muassa stressitilanteiden synnystä ja niiden hyvinvointivaikutuksista.

Understanding how corporate owners respond to dividend taxation is essential in order to minimize the excess burden caused by it. Dividend taxes reduce the return on investment and may, therefore, distort savings and investment in the economy. Moreover, following the basic setting of a consumer's maximization problem, dividend taxation restricts the consumption funded with dividend, and therefore, may reduce the owner’s willingness to put effort on the firm. However, the empirical evidence of such real responses is somewhat controversial. In this study, I use comprehensive Finnish data on Finnish corporations’ main owners to pursue the existing literature and to provide empirical evidence from Finland. In the analysis, I observe years 2000-2013 and three different dividend tax schedules in use. The data include more than 600,000 observations during the research period. I quantify the intensity of the responses to dividend taxation with the elasticity of taxable income (dividend tax elasticity). The elasticity of taxable income is a key parameter in the efficiency analysis of income taxation. It indicates how much income subject to taxation changes as the net-of-tax rate changes; therefore, it captures most responses to taxation including reduced production, distorted investment decision and tax planning. The majority of the earlier empirical literature has used the Difference-in-Differences (DD) method and a change in the tax rate to estimate the elasticity. However, the recently developed bunching method has several benefits relative to the DD, including fewer assumptions required. The bunching method uses discontinuities in the dividend tax schedule to estimate the dividend tax elasticity. In Finland, the marginal tax rate on dividends increased from 26 % to 40.5 % at a dividend income level of €90,000 in 2006–2011. These kinds of tiers in the marginal tax rates are likely to induce bunching which can be used to estimate the elasticity of taxable income. By using discontinuities in the dividend tax schedule as a source of variation, I find exceptionally clear dividend responses to the increase in a marginal dividend tax rate. The bunching evidence is substantial, and the estimated dividend tax elasticity is approximately 0.5. Furthermore, I study investment responses induced by dividend taxes by exploiting reforms in the dividend tax schedule. While I show that dividend payments respond strongly to dividend taxation, my descriptive analysis of real responses does not suggest that firms facing a dividend tax increase decrease their real investments in the short run. In fact, the descriptive results suggest that most of the responses are related to tax planning such as income-shifting. This topic has not been studied empirically in Finland before. My thesis provides a credible estimate of dividend tax elasticity in Finland. The elasticity of taxable income is a key parameter in evaluating tax policy, as it helps policy planners to estimate the effect a tax cut or an increase may induce. However, the elasticity of taxable income is a function of the tax base and income shifting possibilities and incentives (such as differences among tax bases) among others. Thus, the broadness of the tax base and income shifting incentives need to be taken into account when planning reforms. In addition to the dividend tax elasticity estimate, this thesis provides further description of the behavioral responses and the Finnish income tax system. My descriptive results indicate that, in the short term, Finnish corporate owners are mainly responsive to dividend taxation through tax planning rather than through investment decisions. Thus, dividend income tax reforms motivated solely with short term investment growth effects should be treated with caution.

Migration has been increasing steadily during the past decades and it has become an important phenomenon around the globe. It affects both the developed and the developing world and most of the migration still happens from a poorer country to a richer one (South-North migration). Migration can have both positive and negative effects for the source country’s economy. On one hand, the so-called 'brain drain', where the much-needed talent flows away, can be considered as a bad phenomenon. On the other hand, this negative effect can be mitigated i.e. by the resulting intra-family remittances that contribute to the economy of the source country. Nowadays, the amount of remittances is over three times the amount of the Official Development Aid (ODA). The possibility for migration could also potentially build an incentive for the source country’s individuals to gain education. The purpose of this thesis is to explain these effects in the context of the Least Developed Countries. In this thesis, a model is being built, which explains both the education investments and the remittance decision-making in among the families in the LDCs. The starting point is a two-sided altruistic OLG-model between the parent and the child. It explains the parent’s incentive to invest in her child’s education and also her child’s incentive for remitting money to his parent. The model is first derived in a closed country after which it is compared to a model that is open for migration. It is assumed that both the educated and non-educated worker’s can migrate. When the wage ratio between the educated and non-educated workers’ is smaller in the country of destination than in the source country, the educational attainment level doesn’t increase. Another important issue is the fact that the poor families are liquidity constrained. These assumptions, together with the symmetric information of the true ability of the migrants, are found to decrease the educational attainment level in the source country. Hence, migration seems to benefit the economies of the LDCs only from remittances. If the model assumes asymmetric information between the employer of the destination country and the migrant worker, it is possible to derive a result where the educational attainment level of the source country increases. This is because the workers with lower productivity can benefit from the higher output of the high-productivity workers. The effect is, however, temporary and if the workers are able to signal their true ability with low enough costs, the effect is also relatively small. Asymmetric information might, however, explain the discrimination that the higher than average ability migrants face and thus also explain the high proportion of entrepreneurs among the migrants compared to the destination country’s population. This thesis doesn’t take into account the effects of remittances to the economic growth. The results of the model, however, suggest that at least the LDCs may suffer from the migration due to the decreased attainment level of education and thus the resulting lower per capita output. Migration can hence deepen the poverty trap that the poor countries already face. If, however, the received remittances are used in education or other investments that helps the economy grow, the migration can still be positive also for the poor countries. The remittances may at least help to reduce the poverty of the LDCs in absolute terms.

The aim of this thesis is to enlighten, to what extent an income tax cut is self-financed in Finland. Currently, labour taxation in Finland is relatively high compared to other OECD countries. In addition, the demographic structure of Finland suggests that the same services should shortly be provided for a growing user base. Examining deadweight losses and degrees of self-financing is the building block for making political decisions and thus crucial for improving the effectiveness of taxation. This thesis revolves around the Sørensen´s model, which estimates deadweight losses from taxation and which has been applied to data for Sweden. Aside from the income tax, also tax on consumption, tax on saving and corporate tax are included in the model. In the Swedish context, Sørensen exhibits the total degree of self-financing resulting from a cut in effective marginal tax rate on labour income to be as high as 32,8%. This thesis examines the model in the Finnish case. In order to apply the model to Finland, data is obtained from Statistics Finland as well as the Finnish Ministry of Finance. The end result of this research states that the total degree of self-financing associated with an income tax cut is even larger in Finland than in Sweden, with a value of 39,27%. The thesis concludes in a comparison of the two neighbouring countries. Even though Sweden and Finland both have relatively high taxation, they differ in many aspects. Firstly, the tax base is different in Sweden as opposed to Finland. Secondly, the Swedish negotiation culture has implications on the country´s labour market. In addition, the production structure in Sweden is more diverse and the nation is wealthier in capital goods. Lastly, the calibrations were computed in different years, which affected the parameters used in the calculations. Based on the above, it is imperative that aside from the similarities, there are also vast differences between Sweden and Finland.

Since the collapse of the Soviet Union Russian economy has suffered from high and volatile inflation. In 2014 the Russian central bank announced that it will stop supporting the national currency through market operations and adopt an inflation targeting regime in the beginning of 2015. The announcement of the policy drew a widespread critique in public discussion stating that inflation in Russia has too many sources of non-monetary inflation for an inflation targeting policy to be effective. In this thesis I provide a literature review on the inflation targeting regimes and the non-monetary inflation sources. Further, I analyze non-monetary inflation sources in the context of Russia and present the data available on these sources. In the empirical part of this study I use data on budget deficit, the amount of newly passed laws and prices for housing and utility services in vector autoregression models to find out if these non-monetary inflation sources are statistically significant factors in explaining the changes in inflation expectations in Russia. My results indicate that the role of the non-monetary inflation sources in the effectiveness of the inflation targeting regime has been overstated in the critique voiced at the time of the regime change. While there is a persistent gap between the inflation expectations of consumers and central banks inflation target or the official consumer price index changes, the model that excludes the non-monetary sources is a best fit to explain the expectations.

Team problems are inherent in today’s world, as individuals often must collaborate in various settings from production to service provision. The need for collaboration originates from a group of agents’ pursuing a common goal. This dissertation is a literature overview of what kind of inefficiencies arise from these kinds of projects, and how to possibly overcome them. The focus is on games that consider the provision of public goods, or in other words, large-scale voluntary contribution projects. Examples of these kinds of projects are, for instance, library collections, public parks and environmental protection. What characterizes these projects, is that collaboration is not only a one-time effort but requires continuous work over multiple periods. This dynamism together with voluntary commitment, results in to the fact that the effort is not only underprovided but also distorted. Participants in these projects face the incentive to hold back their own contributions in order to free-ride on others’, but, at the same time, want to frontload. The previous means that the participants want to contribute to the project in order to encourage others to increase their future contributions. So, these kinds of projects are inefficient in the sense that the effort provision is distorted, and the projects tend to last longer than optimally. The previous happens as the participants fail to cooperate as efficiently as in the social optimum. In order to understand the underlying reasons behind this cooperative failure, I deconstruct a dynamic and voluntary game that considers the provision of a public good. In the game, a group of agents must exert costly effort over time to contribute to a project which is divided into sub-projects. The game ends once a prespecified threshold amount of effort is accumulated. Participants of the game can base their contribution decisions only on the commonly observed state of the project and how they expect others to behave. Individual contribution costs and levels are private information. The examined model presents that the underlying reason behind the inefficient outcome are the facts that agents’ contribution costs are hidden and that the agents move simultaneously. Social optimum would be achieved if group size could increase without bound. When group size cannot tend to social optimum, the agents must control the degree of dysfunctional behaviour by forming smaller groups and form arrangements to control agents’ incentives to deviate from cooperative behaviour. Examples of these kinds of systems are self-imposed sanctioning systems, sanctioning systems with a centralized authority, deadlines and infrequent monitoring. The strengths and weaknesses of these systems are briefly discussed in order to understand how feasible it is, in fact, to restore efficiency for dynamic games that rely on voluntary contributions. To further help the reader understand the deep-rooted role of free-riding and frontloading in these kinds of projects, few extensions to the model are covered from complementary contributions to uncertainty in outcome.

The significance of knowledge and innovation has become an increasingly important part of international trade. Consequently, there have been continuous efforts to globally improve protection of intellectual property rights (IPRs) through international trade agreements related to IPRs. The most comprehensive agreement is the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) that came into force on 1st of January 1995. As a founding part of World Trade Organization (WTO) it brought rules of IPR protection into the multilateral level. The increased attention on IPR protection has awakened concerns and stimulated research regarding the effects of IPR protection on both developing and developed parts of the world. Theoretical literature has been incapable of finding unanimous results regarding the effects of IPR protection. The main focus of this thesis is to study the effects of stronger IPR protection in both developed and developing parts of the world as well as the conditions and assumptions on which the effects depend. More precisely speaking, the thesis studies the steady state effects of IPR protection especially on FDI, Northern innovation rate and the wage gap between developed and developing countries. As FDI is considered being one channel of technology transfer from developed countries to the developing part of the world, also the effect of IPR protection on technology transfer is studied indirectly. This thesis presents two North-South product cycle models, with innovation, foreign direct investment (FDI) and exogenous imitation. The main focus of the thesis is on analyzing and comparing the steady state equilibrium effects of these two product cycles that generate different results of the effects of IPR protection. Product cycle by Glass and Wu (2007) suggests that stronger IPR protection leads to decreased wage gap between the North and the South, decreased rate of aggregate innovation and decreased share of multinational production. However, product cycle by Dinopoulos and Segerström (2010) suggests that stronger IPR protection results in decreased wage gap between the North and the South, temporarily increased innovation rate and increased share of multinational production. The existing empirical literature supports the findings by Dinopoulos and Segerström (2010) that give a rather positive view of the effects of IPR protection. The inconclusiveness of the results of the product cycles is studied in the thesis. Different assumptions and conditions made when constructing the product cycles explain the inconclusiveness of the results not only concerning the two product cycles presented in the thesis but also other theoretical literature. The main difference in the assumptions of the two product cycles is their industry formations. The model by Dinopoulos and Segerström (2010) is found to be more realistic. Its results are supported by empirical evidence and they have implications for policy and practice.