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The Impact of Inflation on Business and Trade: a case study of Ghana and Canada

The thesis looks at the relationship between inflation, interest rate, exchange rate and GDP for a developed country (Canada) and a developing country (Ghana). Through a detailed literature search looking at the economies of Ghana and Canada as well as statistical analysis using least squares and regression models the following questions were addressed: 1) What is the impact of inflation on businesses and trade? 2) Most businesses depend on loans to run their business operations. What is the correlation between inflation and ...

Term Structure of Interest Rates

In this paper we report the currently employed term structure estimation method in the Bank of Finland and we also discuss interpretation of the final results it produces. First we will introduce 2 extensively utilized term structure estimation methods: the Cubic Spline Function method and the Nelson-Siegel approach. We assess their results, paying exclusive attention to the smoothness of forward interest rates and distribution of pricing errors. After that, we present the Bank of Finland's approach, commenting on its pros ...

Project category: Economics, Finance
Inflation Targeting and the Role of Money in a Model with Sticky Prices and Sticky Money

In order to study the role of money in an inflation targeting regime for monetary policy, we compare the interest rate and money as monetary policy instruments. Our dynamic stochastic general equilibrium model combines the money-in-the utility-function approach with sticky prices. We allow for time-varying preferences for real money balances, ie velocity shocks, and stochastic aggregate costs in production, ie 'technology shocks'. We show that conditioning the interest rate on the expected future cost change can be used to achieve ...

Project category: Economics
Banks Nonperforming Assets and Write-Offs in 1992

In this paper we present data collected by the banking supervision authorities on banks' nonperforming assets and loan losses with a view to establishing a consistent database for analysing the condition of Finnish banks and firms. Over the past couple of years some FIM 100 billion's worth of banks' exposures have been nonperforming, for shorter or longer periods of time. At the end of 1992 banks' nonperforming assets amounted to FIM 55 billion, after writeoffs of FIM 22 billion for ...

Project category: Finance
A Model of Common Monetary Policy

This paper analyses the prerequisites for and the results of unanimous monetary policy decisions in a monetary union consisting of heterogeneous members. The analysis is based on a multicountry version of Rogoff's model of the determination of monetary policy in the presence of supply shocks. It is shown that an international transfer system can be designed which creates consensus both on the average rate of inflation and the common response to asymmetric shocks to the participating economies. We conjecture that ...

Project category: Economics
Monetary policy, expected inflation and inflation risk premia

Within a New Keynesian business cycle model, we study variables that are normally unobservable but are very important for the conduct of monetary policy, namely expected inflation and inflation risk premia. We solve the model using a third-order approximation that allows us to study time-varying risk premia. Our model is consistent with rejection of the expectations hypothesis and the business-cycle behaviour of nominal interest rates in US data. We find that inflation risk premia are very small and display little ...

Project category: Economics
Private Indebtedness and the Banking Crisis

In Finland the private sector borrowing started to rise rapidly in conjunction with the liberalization of capital movements and deregulation of the domestic financial sector during the second half of the 1980s. The financial deregulation coincided with and amplified an economic boom marked by favourable income expectations, loose fiscal policy associated with improved terms of trade and anticipated reduction in income tax rates. All these factors contributed to the overheating of the Finnish economy that finally turned into a severe ...

Project category: Economics
Effects of fiscal policy on the durability of low inflation regimes

This paper deals with the interaction of fiscal and monetary policy when the central bank is pursuing a price stability-oriented monetary policy. In particular, we study the durability of the price stability regime when public debt accumulates as a result of ultimately unsustainable deficits. The growth of indebtedness causes the collapse of the price stability regime after a period of rising deficits. The budget deficit is endogenously determined in the model, as a result of government’s decisions on how to ...

Project category: Economics
Policy interaction, learning and the fiscal theory of prices

We investigate both the rational explosive inflation paths studied by McCallum (2001) and the classification of fiscal and monetary policies proposed by Leeper (1991) for stability under learning of rational expectations equilibria (REE). Our first result is that the fiscalist REE in the model of McCallum (2001) is not locally stable under learning. By contrast, in the setting of Leeper (1991), different possibilities can obtain. We find, in particular, that there are parameter domains for which the fiscal theory solution ...

Project category: Economics
What if the Fed Had Been an Inflation Nutter?

A structural rational expectations model of U.S. monetary policy is used to make a counterfactual experiment of a strongly inflation averse Federal Reserve Bank. Results for U.S. interest rates, output, and inflation over 1965-1999 are discussed. Introduction : This paper studies how U.S. output, inflation, and interest rates would have evolved 1965-1999 if the Federal Reserve Bank had been more inflation averse. This counterfactual experiment is done with a structural rational expectations macro model.Similar types of counterfactual experiments are discussed in ...

Project category: Economics

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