An earlier version has been circulated as "The interaction of monetary and macroprudential policies in economic stabilisation", Bank of Finland Research Discussion paper 1/2016, January 2016, and HECER Discussion paper No. 395, September 2015.
Abstract: I analyse a New Keynesian DSGE model where the financing of investments is affected by a moral hazard problem. I solve for jointly Ramsey-optimal monetary and macroprudential policies. I find that when a financial friction is present in addition to the standard nominal friction, the optimal policy can replicate the first-best if the social planner can conduct both monetary and macroprudential policy. Using monetary policy alone is not enough: there is a policy trade-off between stabilising inflation and output gap. When policy follows simple rules, the source of fluctuations is relevant for the choice of the appropriate policy mix.
Joint with Samu Kärkkäinen
Abstract: We study whether the level of household indebtedness is related to the interest rate elasticity of private consumption. Looking at Finnish aggregate data, we find no robust evidence of increased interest rate elasticity of private consumption even as the household sector's debt-to-income ratio has almost doubled in the past 20 years. Estimates based on the household-level Finnish Wealth Survey suggest that the share of liquidity-constrained households has declined over the same time period, which may have contributed towards muting the sensitivity of private consumption to interest rates even as aggregate debt of the household sector has grown significantly. Our results are consistent with the key role played by heterogeneity in credit and liquidity constraints in driving aggregate consumption and debt dynamics. Other factors behind muted responses of consumption to interest rates may include the recent low interest rate period, which has muted the cash-flow channel of monetary policy, and possible asymmetric effects of monetary policy.
Joint with Petri Mäki-Fränti, Adam Gulan and Juha Kilponen
Abstract: We study the impact of monetary policy on income and wealth distributions in a small open economy. To do so, we use household-level registry and survey data from Finland, a small member of a monetary union. This setup allows us to circumvent endogeneity issues and thus helps achieve causal interpretation. We find that expansionary monetary shocks stimulate economic activity, earnings, and asset prices, while barely affecting income and wealth inequality. The reduction in unemployment mostly benefits households in lower income quintiles, where the initial rate of unemployment is high. Households in upper income quintiles, where the rate of employment is higher, benefit relatively more from higher wages. Higher house prices increase the net wealth of all homeowners. However, due to a leverage effect, households with large mortgages located in the lower net wealth quintiles benefit most. Rising stock prices, in turn, benefit mainly households in the top net wealth quintile. Overall, these different channels have counteracting effects on income and wealth inequality.
Joint with Fabio Verona
Abstract: In this paper we present Aino 3.0, the latest vintage of the dynamic stochastic general equilibrium (DSGE) model used at the Bank of Finland for policy analysis. Aino 3.0 is a small-open economy DSGE model at the intersection of the recent literatures on so-called TANK (“Two-Agent New Keynesian”) and MONK (“Mortgages in New Keynesian”) models. It aims at capturing the most relevant macro-financial linkages in the Finnish economy and provides a rich laboratory for the analysis of various macroeconomic and macroprudential policies. We show how the availability of a durable consumption good (housing), on the one hand, and the presence of credit-constrained households, on the other hand, affect the transmission of key macroeconomic and financial shocks. We also illustrate how these new transmission channels affect model dynamics compared to the previous model vintage (the Aino 2.0 model of Kilponen et al., 2016).
An earlier version has been circulated as "House prices, lending standards, and the macroeconomy", Bank of Finland Research Discussion paper 4/2017, January 2017, and HECER Discussion paper No. 407, January 2017.
Abstract: What is the relationship between macroeconomic conditions and household borrowing? When is there too much debt? To answer these questions, I develop an overlapping generations model of the housing market where households are subject to idiosyncratic income risk, which is private information. Selection in the credit market is then towards less creditworthy borrowers, and over-investment into housing naturally emerges as an endogenous market equilibrium of the model. I show that lending standards are loose and the incentives for risky borrowers to apply for a loan are particularly strong, first, when future house values are expected to be high, which leads to high leverage of borrowers; and second, when safe interest rates are low, which implies low borrowing costs. However, there are strong non-linearities in the relationship between borrowing incentives and economic fundamentals. This over-borrowing externality can help explain the developments in the U.S. housing market in the early 2000s. It also implies that monetary policy can have a direct impact on the stability of the housing market through the cost of borrowing and the opportunity cost of housing investment.
Corporate debt composition, access to credit and monetary policy, joint with Adam Gulan
Macroprudential policies for a small open economy, joint with Fabio Verona
A model for predicting Finnish household loan stocks, Bank of Finland Economics Review 4/2022. Joint with Juho Nyholm.
Informaatio, luottosyklit ja rahoitusvakaus (in Finnish), Kansantaloudellinen aikakauskirja 3/2018.
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