The Bank of Finland's strategic objective is to be an active member of the Eurosystem. Expertise is crucial to making the Bank a reliable partner both in the framing of monetary and financial markets policy for the euro area and in domestic economic policy. One pillar of this expertise is research that places the Bank of Finland among the world's leading central banks in selected key areas. The Bank builds on its strengths by focusing on issues that serve strategic decision-making in the Eurosystem and by focusing on the development of quantitative tools for monetary policy analysis.
The qualitative objectives of research are based on the publication of research reports in recognised academic forums, active participation in scientific meetings and close cooperation with the academic research community. The quality and visibility of the Bank's work in research and analysis enhance its influence within the Eurosystem.
Key areas of expertise being developed include (quantitative) modelling of monetary policy, analysis of the evolution, efficiency and stability of financial and payment systems as well as knowledge of transition economies and their economic policies. Emphasis in the Bank's research effort is placed on the long-term view with concentration on key areas of expertise.
Research at the Bank of Finland is carried out in two separate units within the Monetary Policy and the Research Department. Within the Research Unit, research activity is organised in two research programmes: macroeconomics and financial markets. In addition to its research work the Bank's second research unit, the Institute for Economies in Transition (BOFIT), also monitors the Russian and Chinese economies and provides an information service on them.
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The macroeconomics research programme (monetary policy modelling) is used for developing the expertise that keeps the Bank of Finland among the leading central banks in quantitative analysis of monetary policy. Research within the programme fosters and strengthens the Bank's expertise in the methods of modern dynamic macroeconomic theory. Research supports the development and assimilation of modelling technologies that can be used in the (quantitative) analysis of key monetary policy issues such as the credibility of the policy and issues relating to expectations formation. Incorporating financial market imperfections along the line emphasized by modern financial market research into modern dynamic macro models is one of the key challenges facing the development of policy relevant macro models in the future.
- Policy simulation and forecasting model of the Finnish economy
- Core of the model fully in line with modern dynamic macroeconomics
- Special features around the 'Neoclassical' core
- heterogeneous population: workers and retirees
- imperfect competition in labour and goods markets
- inertia in wage and price adjustment, costly investment adjustment
- social security system with close resemblance to the Finnish system
- The model provides a common platform (and "language") for policy analysis and research on monetary policy
- The model has proved its strengths in various policy exercises
- General experience in using corresponding DSGE models for forecasting is still not plentiful.
- BoF is pioneering in its use of a DSGE model to produce forecasts of the Finnish economy
- BoF has become an exporter of such specialised know-how, for which there is strong demand.
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Research in the financial markets research programme (future of the financial services sector) concentrates on issues relating to the integration, efficiency and stability of financial markets. In addition to macroprudential analysis, the programme is designed to encourage research on the effects of globalisation and technological financial market innovations. These innovations mainly concentrate on payment and settlement systems, on the degree of competition in and stability of financial markets, and, ultimately, on the entire field of operations of central banks and financial market supervision and regulation.
Financial market research focuses on issues related to the integration, efficiency and stability of financial markets within the framework of three main research areas
- Efficiency and integration of financial systems
- technological progress, financial innovations and global financial market integration
- effects on the structure, competitiveness and efficiency of the markets, on financial intermediation and systemic risks
- challenges for central banking, legislation and financial market supervision
- Payment and settlement systems
- system development, technological innovations (eg. electronic money and new electronic distribution networks)
- system reliability and efficiency, simulation studies
- Stability of financial markets
- contagion, risk concentrations and transfers across sectors and inside institutions
- stability implications of financial market regulation and supervision
- vulnerability of financial markets, especially of the banking sector
- stress tests
- analysis of valuation bubbles
- incorporation of macroeconomic forecasting framework into a model of the banking sector for the purpose of generating banking sector forecasts and stress tests.
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The third programme, research on economies in transition, is carried out in the Bank of Finland Institute for Economies in Transition (BOFIT), which concentrates primarily on applied macroeconomic research, with special emphasis on monetary analysis and economic policy. Geographically, the focus is primarily on Russia, although China is also covered. Both for reasons of research strategy and for the development of expertise, it is also essential to carry out comparative research involving other transition economies, and, where necessary, to take a broad overview of emerging economies. Monetary research focuses on issues relating to monetary policy and exchange rates. In future, research on issues such as the Russian banking sector will also gain importance. The key focus in economic policy research regarding transition economies is on the interaction between monetary and fiscal policy. An additional aim is to enhance understanding of the impact of these countries' economic integration on the world economy. For example, continued growth in Russia and China will increase their weight in the international capital and commodity markets, which could in turn have implications for macroprudential analysis. BOFIT is planning to increase integration between research projects by launching an extensive research programme focusing on the key area of the unit's research. The programme is scheduled to last several years and will also involve input from both Finnish and foreign researchers from outside the Bank of Finland. Research on economies in transition also aims at enhancing the Bank of Finland's reputation, both within the Eurosystem and in other contexts, as an expert on the Russian economy and emerging economies more broadly, and on the risks relating to their development. This is an important area of expertise as the significance of these countries' economies continues to grow.
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The three research programmes of the Bank of Finland all account for approximately the same amount of researcher work-years, annually. Recruitment is aimed primarily at doctoral-level economists, as they are best equipped to carry out high-quality research of academic standard, in line with the Bank's research policy.
In the Research Unit, the resource for research projects is primarily based on visiting researchers, either from within the Bank or from outside, who join a given project on a fixed-term basis, for up to a year. The projects are managed by the head of the Research Unit and three PhD level research supervisors, who also actively engage in research. Weekly research workshops and tailored project specific meetings are essential elements of research projects and their management.
At the BOFIT, research is carried out by both regular staff and visiting researchers. BOFIT has, on average, two visiting scholars at any one time. Research projects are primarily presented and discussed in BOFIT seminars, which are occasionally also open to researchers from outside the Bank of Finland.
The Bank strongly encourages researchers to engage in international networking through joint research projects and participation in international research meetings. The Bank regularly organises scientific meetings in cooperation with recognised international research institutes. This enhances awareness of the Bank's research in the research community.
The Bank continues to develop concrete means for evaluating the success of its research activities. The number of research papers that pass the market test, ie publication in international refereed journals, is naturally one way, but not the only one. We monitor the publication process as a whole: following the number of discussion papers, the number of papers sent for publication in journals and the participation in international research meetings. On the other hand, there is at present no natural academic market for all the material produced by central bank research activities. This is particularly the case for applied research supporting policy analysis. Greater effort will be devoted in future to increasing the visibility of this type of central bank research.
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