Browsing by discipline "Economics"

In this thesis, I study the determinants of Finland-Sweden bond yield spread during 1995-2013 by using the Ordinary Least Squares (OLS) approach. I form different regression models, where Finland-Sweden 10-year bond yield spread is dependent variable and variables, based on the bond pricing theory, are explanatory variables. In addition to the regression analysis, I conduct a plot analysis, in which I aim to study whether there are any certain events that may have affected the bond yield spread. The idea behind the plot analysis is that the EMU membership of Finland may have increased the bond yield spread, mainly due to the lack of a lender of last resort. The results from the regression analysis suggest that risk aversion was possibly an important determinant of Finland-Sweden bond yield spread developments during the crisis period 07/2007-12/2013. The risk aversion was measured by the VIX-index. The study also finds some support that other things rather than country specific fiscal fundamentals where driving the bond yield spread during 01/1995-12/2013. The plot analysis results suggest that It is possible that the convergence of bond yields across euro countries and Sweden, were one reason for bond yield spread developments before the crisis period. The results also show that the announcement of the new European Central Bank`s Outright Monetary Transactions (OMT) program in 2012, likely started the fall in the bond yield spread. In addition, during the crisis period, Finland`s bond yield may have benefited from the global risk aversion but not as much as Germany and Sweden.

In this thesis the existence of Long Tail effect in Finnish music industry is studied. The Long Tail effect is defined as the expansion of music supply to include a higher number of niche products instead of focusing on fewer ‘superstar’ hits. Emergency of ‘superstar’ hits has been the trend in entertainment industry since the invention of mass media and music recording, but new technological innovations can start to challenge it. The source of the Long Tail effect is in newer technological innovations, such as online distribution services and digital production tools, which lower the cost of producing music and distributing it to customers. Previously the costs of production and distribution limited the amount of producers that entered the market, but with new technologies the barrier of entry is lower than ever. This allows higher number of producers to produce music and bring it to the market, thus expanding the variety of supply. The new products won’t take hits’ place on the top of the charts, but they can take bigger share of the market than before. The goal of this thesis is to study whether the Long Tail effect exists in Finnish music market or not. To do this the record companies are assumed to produce commercial and creative output, and production functions for both are defined. Then two hypotheses are formed regarding these outputs and digitalization. First hypothesis states that if the Long Tail effect exists, the creative output is higher for firms that have adapted to digitalization. Second hypothesis is that if the Long Tail effect exist, the commercial output is not affected by the adaption to digitalization. To test the hypotheses, empirical data for 52 record companies is collected and used. Business register data is used to measure companies commercial output, labor input and capital inputs. National Library legal deposit database is used to measure creative output and intangible capital input. A measurement for digitalization is created by observing the availability of companies’ releases in YouTube and Spotify. Commercial output is estimated from the empirical data with OLS regression model and creative output is estimated with Negative Binomial regression model. The significance of digitalization is tested for both outputs. The results for these estimations show that in case of commercial output, none of digitalization variables used in the estimation affects the output. This is in line with the hypothesis regarding commercial output, which supports the existence of Long Tail effect. In case of creative output, all digitalization variables have significant and positive effect on the output. This is in line with the hypothesis regarding creative output, which supports the existence of Long Tail effect. Similar estimations are also done for second dataset, where three largest companies are excluded as potential outliers. The results for this dataset are the same. Digitalization doesn’t affect commercial output, but it increases the creative output. Conclusions from the results of this thesis are that they support the existence of Long Tail effect in Finnish music market. The two hypotheses that support the Long Tail effect were that digitalization doesn’t affect the commercial output and digitalization increases the creative output, and the results show that both hypotheses are true. For robustness the estimation was done for a second dataset where three largest companies were excluded as potential outliers, and results from this estimation also support the existence of Long Tail effect.

Does carbon dioxide predict temperature? No it does not, in the time period of 1880-2004 with the carbon dioxide and temperature data used in this thesis. According to the Inter Governmental Panel on Climate Change(IPCC) carbon dioxide is the most important factor in raising the global temperature. Therefore, it is reasonable to assume that carbon dioxide truly predicts temperature. Because this paper uses observational data it has to be kept in mind that no causality interpretation can be made, only predictive inferences. The data is from the years 1880-2004 and consists of carbon dioxide emissions and temperature anomalies, the base period for the anomalies is 1961-1990. The main analysis method is the cointegrated VAR model but also the standard VAR model is used. The variables were tested for possible unit roots and it was found that there were unit roots present. Then the variables were tested for the cointegrating rank and here the analysis divided into three parts. One, with the assumptions that the variables are integrated of order one, a constant as a deterministic term and one cointegrating relation. Two, variables are allowed to be integrated of order two, a linear trend as a deterministic term and one cointegrating relation. Three, based on some weak evidence there was a result that variables weren’t cointegrated and the analysis could be done in differences. In the first the case it the result was that carbon dioxide doesn’t predict temperature but actually temperature predicted carbon dioxide, the second version gave the same result. In the third case neither one of the variables predicted the other one. These results go against the what is considered as the common consensus in the subject matter of climate change.

In contrast to conventional economic growth theory, natural resource abundance can harm country's economic growth. This puzzling phenomenon is called resource curse. Resource curse is defined as a decrease in national income due to an increase of natural resources. In general, resource rich countries have had lower growth rates than their resource poor counterparts during last four decades. However, not all resource abundant countries perform poorly. There are also countries with large natural resources that have experienced fast economic growth. Recent studies have suggested that institutional quality could explain this divergence. By institutions it is referred for example to the level of corruption, rule of law and government accountability. This thesis examines whether institutional quality has any effect on resource curse and whether differences in institutional quality explain the divergence between well and poorly performing resource abundant countries. The problem is examined with two rent-seeking theories. The first one (Mehlum et al. 2006a) examines entrepreneurs' allocation between two competing activities: production and rent-seeking activity. The institutional quality of the country determines whether or not natural resources induce the entrepreneurs to participate in rent-seeking activity. The second theory (Robinson and Torvik 2013) differs from Mehlum et al. in the specialization possibility and functional forms used. It shows that the allocation decision of entrepreneurs and the aggregate income of the country are conditional on the institutional quality of the country. Both theories examine how entrepreneurs' allocation decision and national income respond to an increase in natural resources. Resource curse is shown to exist only in countries with poor institutions. In that case an increase in natural resources decreases national income because talents are transferred into rent-seeking activity. Strong institutions mitigate the entrepreneurs’ participation to rent-seeking activity. As more entrepreneurs are participating in production activity and incentives to participate in rent-seeking are mitigated, the national income is increased. Institutional quality determines whether a resource rich country suffers from resource curse. Institutions are shown to be essential in explaining the divergence of resource rich countries to well and poorly performing. Resource rich country can turn the curse over by improving its institutions. The results stress the importance of underlying institutions on economic performance.

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.

Pro-graduni käsittelee dopingin määrän vähentämistä urheilussa. Tutkin dopingin määrän vähentämistä urheilussa peliteoreettisin keinoin. Katson urheilua tutkimuksessani taloudelliselta kannalta. Tutkimukseni metodina käytän kirjallisuuskatsausta. Tutkimuksen motivaationa voidaan pitää nykyisen antidopingtoiminnan toimimattomuutta ja sitä, kuinka paljon rahaa urheilussa liikkuu. Täten on hyvä kitkeä urheilusta vilppi pois. Aiemmassa kirjallisuudessa voidaan erottaa selvästi kaksi eri tutkimus-suuntaa. Osa tutkimuksista keskittyy yksittäisten urheilijoiden kannustimeen käyttää dopingia. Osa tutkimuksista taas keskittyy siihen, kuinka antidopingorganisaatioiden toiminta ei ole uskottavaa. Kun tutkitaan dopingin määrän vähentämistä urheilussa dopingin käytön kannustimien vähentämisellä, voidaan saada seuraavia johtopäätöksiä. Yksi keino vähentää dopinginkäyttöä on lajien sääntömuutokset, jolloin urheilijat joutuvat tekniikkamuutoksiin ja täten dopingin vaikutus suoritukseen vähenee. Myös rangaistuksen koventaminen ja esimerkiksi sakkorangaistuksiin siirtyminen voisi toimia dopingin käytön kannustimen pienentämiseen. Kun dopingia ja harjoittelua katsotaan substituutteina, voidaan huomata antidopingtoiminnalla olevan myös haittapuolia, kuten harjoittelun kannustimen pieneneminen. Tämän takia myös sallittu suorituskyvyn parantaminen pitää ottaa huomioon rankaisumenetelmää mietittäessä. Jos taas dopingin käyttö ja sallittu suorituskyvyn parantaminen lasketaan komplementaarisiksi toisilleen todennäköisyysvaikutus vaikuttaa dopingin käyttöä kasvattavasti. Pohjapalkalla taas voidaan pienentää dopingin käytön kannustinta, sillä silloin voitosta saatava hyöty pienenee. Aikaisemmista tutkimuksista käy myös ilmi, kuinka sijoitusperusteinen rankaisujärestelmä toimisi dopingin ehkäisemisessä paremmin kuin tämän hetkinen järjestelmä, jossa urheilijoita rangaistaan tasavertaisesti sijoituksesta riippumatta. Antidopingorganisaatioiden uskottavuuden puutetta voidaan katsoa kahdelta kantilta; sekä kansainvälisellä antidopingorganisaatiolla että kansallisilla antidopingorganisaatioilla on omat uskottavuuden puutteensa. Kansallisen antidopingtoiminnan uskottavuuden puute liittyy siihen, kun organisaatiot ovat taloudellisesti sidoksista kansallisiin olympiakomiteoihin. Olympiakomiteat saavat helpommin rahoitusta, kun valtion urheilijat pärjäävät kilpailuissa ja tämä taas ajaa kansallista antidopingorganisaatiota höllentämään valvontaa. Tämä voidaan estää sillä, että kokonaisuudessaan antidopingtoimintaa hoitaa kansainvälinen organisaatio, sillä tällä ei ole kannustinta kohdella eri valtioiden urheilijoita eritasoisesti. Myös kansainvälisellä antidopingorganisaatiolla on oma uskottavuuden puutteensa, sillä se on taloudellisesti kytkettynä kansainväliseen olympiakomiteaan. Kiinnostus olympialaisia kohtaan romahtaisi, jos lajiensa huiput käryäisivät dopingista, eivätkä täten saisi osallistua olympiakilpailuihin. Tämän takia myös kansainvälisellä antidopingorganisaatiolla on kannustin lieventää dopingvalvontaa. Tämä voidaan estää tekemällä kansainvälisestä antidopingorganisaatiosta täysin riippumaton urheilukilpailuiden järjestäjistä. Toinen vaihtoehto on palkata antidopingtoiminnan johtajaksi henkilö, jonka inho dopingia kohtaan on pohjaton. Kolmas vaihtoehto kitkeä kansainvälisen antidopingtoiminnan luottamuspula on asettaa toiminnan johtajalle ”tulospalkkaus” tehdystä työstä.

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.

There has been a lot of discussion on the downsides of cash during the 2010’s, while the new payment innovations during this same decade have provoked speculation that cash use will decrease considerably, potentially even disappear, in the upcoming years. However, cash is still used quite extensively, and to my knowledge, no systematic review on drivers of cash use has been made to date. The purpose of this thesis is to fill this gap by providing literature reviews both on the theory explaining cash use and the empirical evidence on the drivers of cash use. Additionally, Finland will be used as an illustration to study the relevance of the existing theories and empirical evidence in an environment where practically no barriers on switching completely from cash use to card use exist. The theoretical models explaining the choice between cash and cards at points of sale are built on assumptions that the pecuniary and/or non-pecuniary costs of cash and cards use differ. Particularly, cards are assumed to be more expensive than cash in some regard, which explains the cash choice. Behaviour wise, cash use is associated with lower transaction value, lower income, higher amounts of cash in the wallet and using cash to monitor liquidity. In empirical literature, factors that affect the payment instrument choice at point of sale are traditionally divided into four categories: payment instrument attributes, transaction specific characteristics, demographic factors and habit. Three out of the four theoretical models presented in this thesis seem relevant in explaining cash use in the view of the empirical evidence, although alternative explanations for the observed behaviour can also be found. Also, several other drivers of cash use are identified. Additionally, as making payments is a very frequent action, it is suggested that habit might have a bigger role in the payment instrument choice than is traditionally assumed, with several of the drivers being potentially a manifestation of habitual behaviour. A considerable limitation of the existing literature is that it focuses solely on explaining and analysing cash use for transaction purposes at points of sale. However, cash is also used for person-to-person transactions and as a store of value, and the reasons for cash use probably differ a lot in these other two use cases. Due to well-developed infrastructure, and cheap and fast card payments, many of the drivers of cash use identified by theoretical models and empirical evidence cannot explain cash use in Finland. In 2016 Finnish people used cash to pay small transactions, to control spending, because they perceived it to be easy to use, when they obtained it from another person or out of habit. Due to the quickly growing popularity of contactless card payments and the mobile phone applications for making easy person-to-person transactions, it is likely, that in future cash will decrease remarkably and it is mainly driven by the need to control spending, difficulty in using electronic payment instruments and habit.

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).

Dynamic scoring is an approach, which strives to take into account the effects that public policy changes and changes in the law have on the macroeconomic variables. Scoring is an estimate of the effects the policy change is expected to bring. Compared to the traditional approach, dynamic scoring offers more information of the effects, but does this with increased uncertainty. In their paper “Dynamic scoring: A back-of-the-envelope guide” (2006) N. Gregory Mankiw and Matthew Weinzierl use neoclassical growth model, or Ramsey growth model, to examine how large a part of capital and labor income tax cuts pay for themselves by inducing higher economic growth, i.e. the size of the dynamic feedback effect. Their focus is on the changes of tax revenue. They use first a basic model with Cobb-Douglas production and inelastic labor supply, then relax those assumptions for a more general Ramsey model and then in turn include parameters allowing for finite horizon households, imperfect competition, and externalities to capital investment. Depending on the model used, the dynamic feedback effect varies from model to model, for a capital tax cut from 50 to 74 percent and for a labor income tax cut from zero (with inelastic labor supply) to 21 percent. This thesis extends the Mankiw–Weinzierl model by including a tax on consumption to examine how this affects the dynamic feedback effect. In all the models, there is an increase in the dynamic feedback effect: depending on the model used, it varies for a capital tax cut from 60 to 87 percent and for a labor income tax cut from zero (with inelastic labor supply) to 25 percent. The values of some of the key parameters, namely the constant-consumption elasticity of labor supply and the elasticity of substitution between capital and labor, and the tax rates are revised as well. This further increases the dynamic feedback effect all along the line, in some cases even suggesting a capital tax cut to more than compensate the static revenue loss. Including a tax on consumption into the models increases the dynamic feedback effect, working into the same direction as rising the initial rates of capital and labor income taxes. Using alternative tax rates and values of the key parameters also has a significant impact on the size of the dynamic feedback effect.