Research Newsletter 4/2008

Editorial

Although the tools for doing macroeconomics and, more specifically, business cycle analysis have undergone radical changes during the last twenty five years or so, it still feels right to argue that much of the ongoing macroeconomic research on fluctuations can be regarded as inquiries into the aggregate implications of various imperfections. In this context, Olivier Blanchard, in his review of the current state of macroeconomics, sets out a series of questions that greatly shape the way we still do macro. Apart from nominal rigidities, like slowly adjusting nominal prices, what are the frictions that matter most for macro? How do they affect the dynamic effects of different shocks? How do they introduce at least the possibility of additional shocks? What do we know about these dynamic effects and how important are these shocks?
Read more

Improving the quantitative performance of the standard labour market matching model: introducing heterogeneity among new and existing matches

The experience and knowledge economists have hitherto accumulated from using existing monetary business cycle models to quantitatively account for the various observed features of business cycle dynamics suggests a key role for labour markets. Hence, economists are not only interested in documenting the empirical behaviour of wages, employment and unemployment, but also in building models that help them as well as policymakers to understand the forces that shape these outcomes and in using the models to assess the effects of changes in policies and institutions. Naturally, the usual framework of supply and demand in a frictionless labour market is useful for thinking about and discussing some labour market issues.
Read more

Overlapping claims and the possibility of financial contagion: exploring the Finnish interbank markets

The current prevalence of financial crises makes is tempting to conclude that the financial sector is unusually susceptible to shocks. One possible theory says that we do not need large shocks to understand financial crises, since small local shocks in a particular part of the financial system can be spread by contagion to the rest of the financial sector and then infect the larger economy. Financial contagion could consequently be seen as a process by which eg a problem or crisis that begins in one region spreads to an economically linked region.
Read more

The economic impact of corruption