We analyse the determination of taxes on harmful goods when consumers have selfcontrol problems. ... more We analyse the determination of taxes on harmful goods when consumers have selfcontrol problems. We show that under mild conditions, the socially optimal tax rate exceeds the average distortion caused by self-control problems. Further, we show that in most cases the tax rate chosen in political equilibrium is below the socially optimal level.
ABSTRACT We analyze attempts to implement personalized regulation in the form of sin licenses (O’... more ABSTRACT We analyze attempts to implement personalized regulation in the form of sin licenses (O’Donoghue and Rabin 2003, 2005, 2007) to correct the distortion in the consumption of a harmful good when consumers suffer from varying degrees of self-control problems. We take into account the possibility that consumers may trade the sin good in a secondary market, and show that sin licenses induce only sophisticated individuals with low levels of self-control problems to consume optimally. The consumption of naïve individuals as well as sophisticated individuals with severe self-control problems remains too high, and welfare in equilibrium is decreasing in the level of self-control problems and non-increasing in the level of naivete. Further, we show that introducing a uniform tax on top of a system of sin licenses may improve welfare, whereas a uniform maximum quota would reduce welfare for sophisticates but may increase welfare for naives. Finally, we show that naives would benefit from a scheme where sin licenses are sold for a positive price in the primary market.
We analyze personalized regulation in the form of sin licenses to correct the distortion in the c... more We analyze personalized regulation in the form of sin licenses to correct the distortion in the consumption of a harmful good when consumers suffer from varying degrees of self-control problems. We take into account preference uncertainty, which generates a trade-off between flexibility and commitment provided by sin licenses. We also account for the possibility that consumers may trade the sin good in a secondary market, which partially erodes the commitment power of sin licenses. We show that if sophisticated consumers are allowed to choose any general, individualized pricing scheme for sin goods, they will choose a system of sin licenses. Nevertheless, sin licenses do not implement the social optimum in our general setting. We derive a simple criterion for assessing whether switching to a system of sin licenses improves welfare over linear sin taxes.
We estimate the euro area natural rate of interest using a structural macro model with nominal, r... more We estimate the euro area natural rate of interest using a structural macro model with nominal, real and financial frictions. Our results indicate that during and after the Great Recession the euro area natural rate has been negative. We also find that the natural rate is a useful and relevant monetary policy indicator both from the descriptive and from the normative point of view. First, monetary policy rules which include the natural rate fit the euro area data well, compared to policy rules which do not include the natural rate. Second, a counterfactual exercise indicates that while a monetary policy tracking the natural rate could not attain macroeconomic stability-stable inflation and potential output-it could still help to stabilize the economy.
This paper develops a two-region, three-sector model of economic geography to suggest that the in... more This paper develops a two-region, three-sector model of economic geography to suggest that the international non-tradability of environmental amenities may generate incentives to abuse environmental policy. In equilibrium both regions convert a suboptimally large share of environmental amenities into tradable natural resources. The aim of strategic environmental policy is to increase the size of the domestic market, in order to attract manufacturing firms. We also show that these distortions vanish if (i) also the end products of development are non-tradable or (ii) if there are technologies, which allow amenities to enter international exchange.
We study public funding of banks and non-financial firms in a time of crisis. We find that bank c... more We study public funding of banks and non-financial firms in a time of crisis. We find that bank capitalization is more effective in stabilizing the economy than direct funding to firms, but it also creates larger distortions. We show that the optimal, social-welfare-maximizing, structure of a public funding program depends on its size. Small funding programs should target banks while large programs should be directed at non-financial firms.
Note: This Occasional Paper should not be reported as representing the views of the European Cent... more Note: This Occasional Paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB
ABSTRACT We analyze attempts to implement personalized regulation in the form of sin licenses (O’... more ABSTRACT We analyze attempts to implement personalized regulation in the form of sin licenses (O’Donoghue and Rabin 2003, 2005, 2007) to correct the distortion in the consumption of a harmful good when consumers suffer from varying degrees of self-control problems. We take into account the possibility that consumers may trade the sin good in a secondary market, and show that sin licenses induce only sophisticated individuals with low levels of self-control problems to consume optimally. The consumption of naïve individuals as well as sophisticated individuals with severe self-control problems remains too high, and welfare in equilibrium is decreasing in the level of self-control problems and non-increasing in the level of naivete. Further, we show that introducing a uniform tax on top of a system of sin licenses may improve welfare, whereas a uniform maximum quota would reduce welfare for sophisticates but may increase welfare for naives. Finally, we show that naives would benefit from a scheme where sin licenses are sold for a positive price in the primary market.
This report discusses the role of the European Union's full employment objective in the conduct o... more This report discusses the role of the European Union's full employment objective in the conduct of the ECB's monetary policy. It first reviews a range of indicators of full employment, highlights the heterogeneity of labour market outcomes within different groups in the population and across countries, and documents the flatness of the Phillips curve in the euro area. In this context, it is stressed that labour market structures and trend labour market outcomes are primarily determined by national economic policies. The report then recalls that, in many circumstances, inflation and employment move together and pursuing price stability is conducive to supporting employment. However, in response to economic shocks that give rise to a temporary trade-off between employment and inflation stabilisation, the ECB's medium-term orientation in pursuing price stability is shown to provide flexibility to contribute to the achievement of the EU's full employment objective. Regarding the conduct of monetary policy in a low interest rate environment, model-based simulations suggest that history-dependent policy approaches − which have been proposed to overcome lasting shortfalls of inflation due to the effective lower bound on nominal interest rates by a more persistent policy response to disinflationary shocks − can help to bring employment closer to full employment, even though their effectiveness depends on the strength of the postulated expectations channels. Finally, the importance of employment income and wealth inequality in the transmission of monetary policy strengthens the case for more persistent or forceful easing policies (in pursuit of price stability) when interest rates are constrained by their lower bound.
Introduction 3 2 Financial cycles and euro area recessions 4 3 Financial cycles and business cycl... more Introduction 3 2 Financial cycles and euro area recessions 4 3 Financial cycles and business cycles in a sample of 17 OECD countries 10 4 Concluding remarks 16 5 References 17 6 Appendix 18 List of charts Chart 1. Episodes of falling real house prices and euro area recessions (shaded areas) 5 Chart 2. Episodes of falling real stock prices and euro area recessions (shaded areas) 7 Chart 3. Episodes of falling loans-to-GDP ratio and euro area recessions (shaded areas) 9 Chart 4. Concordance of real activity and financial cycles 11 Chart 5. Concordance of real activity with past and future phases of financial cycles 11 Chart 6. Conditional (contemporaneous) concordance of real activity and financial cycles in expansions and recessions 12 Chart 7. : Conditional concordance of real activity with past and future phases of financial cycles 13 Chart 8. The probability of a recession before and after the peak of a financial cycle 14 Chart 9. Concordance of real activity with past and future phases of credit markets 15 Chart 10. Episodes of falling loans-to-deposits ratio and euro area recessions 18 Chart 11. Episodes of rising interest rate spreads and euro area recessions 18 Chart 12. Unconditional probability of a downturn phase in the sample of 17 OECD countries 19 Chart 13. Average number of downturn and upturn phases per country (sample of 17 OECD countries) 19 Chart 14. Average length of downturn and upturn phases, quarters (17 OECD countries) 20
This dataset replicates the results for the paper "Can large trade shocks cause crises? The ... more This dataset replicates the results for the paper "Can large trade shocks cause crises? The case of the Finnish-Soviet trade collapse", by Adam Gulan, Markus Haavio, Juha Kilponen
We build a dynamic stochastic general equilibrium model, where both banks’ balance sheets and the... more We build a dynamic stochastic general equilibrium model, where both banks’ balance sheets and the balance sheets of non-financial firms play a role in macro-financial linkages. We show that in equilibrium bank capital tends to be scarce, compared to firm capital: a given change in bank capital has a larger impact on the macroeconomy than a corresponding change in firm capital. We then study capital injections from the government to banks. We show that capital injections can be useful as a shock cushion, but they may be counter-productive if the aim is to avoid deleveraging and to boost investments.
We investigate the causes of the Finnish Great Depression, 1990-1993. We find that the collapse o... more We investigate the causes of the Finnish Great Depression, 1990-1993. We find that the collapse of the overheated financial and banking sectors starting in 1989 was the trigger of the economic crisis. Foreign shocks, which include the collapse of trade with USSR in 1991, can account for at most about half of the slump, and these shocks occurred only when the economy was already in free fall. Also, the deleveraging and restructuring process of the financial system substantially prolonged the subsequent recovery. Our methodology involves estimating a structural VAR model with sign and exogeneity restrictions. Importantly, we are able to distinguish between financial shocks aecting the demand for intermediated
In the aftermath of the global financial crisis many central banks cut their policy rates close t... more In the aftermath of the global financial crisis many central banks cut their policy rates close to zero or even below and introduced non-standard monetary policy measures. The financial crisis and the European debt crisis that followed demonstrated the importance of the linkages between financial markets and the real economy. In this article we survey the open issues in economic research posed by limits on how low central banks are able to cut policy rates, and the unconventional measures, especially forward guidance and large scale asset purchase programmes.
We analyse the determination of taxes on harmful goods when consumers have selfcontrol problems. ... more We analyse the determination of taxes on harmful goods when consumers have selfcontrol problems. We show that under mild conditions, the socially optimal tax rate exceeds the average distortion caused by self-control problems. Further, we show that in most cases the tax rate chosen in political equilibrium is below the socially optimal level.
ABSTRACT We analyze attempts to implement personalized regulation in the form of sin licenses (O’... more ABSTRACT We analyze attempts to implement personalized regulation in the form of sin licenses (O’Donoghue and Rabin 2003, 2005, 2007) to correct the distortion in the consumption of a harmful good when consumers suffer from varying degrees of self-control problems. We take into account the possibility that consumers may trade the sin good in a secondary market, and show that sin licenses induce only sophisticated individuals with low levels of self-control problems to consume optimally. The consumption of naïve individuals as well as sophisticated individuals with severe self-control problems remains too high, and welfare in equilibrium is decreasing in the level of self-control problems and non-increasing in the level of naivete. Further, we show that introducing a uniform tax on top of a system of sin licenses may improve welfare, whereas a uniform maximum quota would reduce welfare for sophisticates but may increase welfare for naives. Finally, we show that naives would benefit from a scheme where sin licenses are sold for a positive price in the primary market.
We analyze personalized regulation in the form of sin licenses to correct the distortion in the c... more We analyze personalized regulation in the form of sin licenses to correct the distortion in the consumption of a harmful good when consumers suffer from varying degrees of self-control problems. We take into account preference uncertainty, which generates a trade-off between flexibility and commitment provided by sin licenses. We also account for the possibility that consumers may trade the sin good in a secondary market, which partially erodes the commitment power of sin licenses. We show that if sophisticated consumers are allowed to choose any general, individualized pricing scheme for sin goods, they will choose a system of sin licenses. Nevertheless, sin licenses do not implement the social optimum in our general setting. We derive a simple criterion for assessing whether switching to a system of sin licenses improves welfare over linear sin taxes.
We estimate the euro area natural rate of interest using a structural macro model with nominal, r... more We estimate the euro area natural rate of interest using a structural macro model with nominal, real and financial frictions. Our results indicate that during and after the Great Recession the euro area natural rate has been negative. We also find that the natural rate is a useful and relevant monetary policy indicator both from the descriptive and from the normative point of view. First, monetary policy rules which include the natural rate fit the euro area data well, compared to policy rules which do not include the natural rate. Second, a counterfactual exercise indicates that while a monetary policy tracking the natural rate could not attain macroeconomic stability-stable inflation and potential output-it could still help to stabilize the economy.
This paper develops a two-region, three-sector model of economic geography to suggest that the in... more This paper develops a two-region, three-sector model of economic geography to suggest that the international non-tradability of environmental amenities may generate incentives to abuse environmental policy. In equilibrium both regions convert a suboptimally large share of environmental amenities into tradable natural resources. The aim of strategic environmental policy is to increase the size of the domestic market, in order to attract manufacturing firms. We also show that these distortions vanish if (i) also the end products of development are non-tradable or (ii) if there are technologies, which allow amenities to enter international exchange.
We study public funding of banks and non-financial firms in a time of crisis. We find that bank c... more We study public funding of banks and non-financial firms in a time of crisis. We find that bank capitalization is more effective in stabilizing the economy than direct funding to firms, but it also creates larger distortions. We show that the optimal, social-welfare-maximizing, structure of a public funding program depends on its size. Small funding programs should target banks while large programs should be directed at non-financial firms.
Note: This Occasional Paper should not be reported as representing the views of the European Cent... more Note: This Occasional Paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB
ABSTRACT We analyze attempts to implement personalized regulation in the form of sin licenses (O’... more ABSTRACT We analyze attempts to implement personalized regulation in the form of sin licenses (O’Donoghue and Rabin 2003, 2005, 2007) to correct the distortion in the consumption of a harmful good when consumers suffer from varying degrees of self-control problems. We take into account the possibility that consumers may trade the sin good in a secondary market, and show that sin licenses induce only sophisticated individuals with low levels of self-control problems to consume optimally. The consumption of naïve individuals as well as sophisticated individuals with severe self-control problems remains too high, and welfare in equilibrium is decreasing in the level of self-control problems and non-increasing in the level of naivete. Further, we show that introducing a uniform tax on top of a system of sin licenses may improve welfare, whereas a uniform maximum quota would reduce welfare for sophisticates but may increase welfare for naives. Finally, we show that naives would benefit from a scheme where sin licenses are sold for a positive price in the primary market.
This report discusses the role of the European Union's full employment objective in the conduct o... more This report discusses the role of the European Union's full employment objective in the conduct of the ECB's monetary policy. It first reviews a range of indicators of full employment, highlights the heterogeneity of labour market outcomes within different groups in the population and across countries, and documents the flatness of the Phillips curve in the euro area. In this context, it is stressed that labour market structures and trend labour market outcomes are primarily determined by national economic policies. The report then recalls that, in many circumstances, inflation and employment move together and pursuing price stability is conducive to supporting employment. However, in response to economic shocks that give rise to a temporary trade-off between employment and inflation stabilisation, the ECB's medium-term orientation in pursuing price stability is shown to provide flexibility to contribute to the achievement of the EU's full employment objective. Regarding the conduct of monetary policy in a low interest rate environment, model-based simulations suggest that history-dependent policy approaches − which have been proposed to overcome lasting shortfalls of inflation due to the effective lower bound on nominal interest rates by a more persistent policy response to disinflationary shocks − can help to bring employment closer to full employment, even though their effectiveness depends on the strength of the postulated expectations channels. Finally, the importance of employment income and wealth inequality in the transmission of monetary policy strengthens the case for more persistent or forceful easing policies (in pursuit of price stability) when interest rates are constrained by their lower bound.
Introduction 3 2 Financial cycles and euro area recessions 4 3 Financial cycles and business cycl... more Introduction 3 2 Financial cycles and euro area recessions 4 3 Financial cycles and business cycles in a sample of 17 OECD countries 10 4 Concluding remarks 16 5 References 17 6 Appendix 18 List of charts Chart 1. Episodes of falling real house prices and euro area recessions (shaded areas) 5 Chart 2. Episodes of falling real stock prices and euro area recessions (shaded areas) 7 Chart 3. Episodes of falling loans-to-GDP ratio and euro area recessions (shaded areas) 9 Chart 4. Concordance of real activity and financial cycles 11 Chart 5. Concordance of real activity with past and future phases of financial cycles 11 Chart 6. Conditional (contemporaneous) concordance of real activity and financial cycles in expansions and recessions 12 Chart 7. : Conditional concordance of real activity with past and future phases of financial cycles 13 Chart 8. The probability of a recession before and after the peak of a financial cycle 14 Chart 9. Concordance of real activity with past and future phases of credit markets 15 Chart 10. Episodes of falling loans-to-deposits ratio and euro area recessions 18 Chart 11. Episodes of rising interest rate spreads and euro area recessions 18 Chart 12. Unconditional probability of a downturn phase in the sample of 17 OECD countries 19 Chart 13. Average number of downturn and upturn phases per country (sample of 17 OECD countries) 19 Chart 14. Average length of downturn and upturn phases, quarters (17 OECD countries) 20
This dataset replicates the results for the paper "Can large trade shocks cause crises? The ... more This dataset replicates the results for the paper "Can large trade shocks cause crises? The case of the Finnish-Soviet trade collapse", by Adam Gulan, Markus Haavio, Juha Kilponen
We build a dynamic stochastic general equilibrium model, where both banks’ balance sheets and the... more We build a dynamic stochastic general equilibrium model, where both banks’ balance sheets and the balance sheets of non-financial firms play a role in macro-financial linkages. We show that in equilibrium bank capital tends to be scarce, compared to firm capital: a given change in bank capital has a larger impact on the macroeconomy than a corresponding change in firm capital. We then study capital injections from the government to banks. We show that capital injections can be useful as a shock cushion, but they may be counter-productive if the aim is to avoid deleveraging and to boost investments.
We investigate the causes of the Finnish Great Depression, 1990-1993. We find that the collapse o... more We investigate the causes of the Finnish Great Depression, 1990-1993. We find that the collapse of the overheated financial and banking sectors starting in 1989 was the trigger of the economic crisis. Foreign shocks, which include the collapse of trade with USSR in 1991, can account for at most about half of the slump, and these shocks occurred only when the economy was already in free fall. Also, the deleveraging and restructuring process of the financial system substantially prolonged the subsequent recovery. Our methodology involves estimating a structural VAR model with sign and exogeneity restrictions. Importantly, we are able to distinguish between financial shocks aecting the demand for intermediated
In the aftermath of the global financial crisis many central banks cut their policy rates close t... more In the aftermath of the global financial crisis many central banks cut their policy rates close to zero or even below and introduced non-standard monetary policy measures. The financial crisis and the European debt crisis that followed demonstrated the importance of the linkages between financial markets and the real economy. In this article we survey the open issues in economic research posed by limits on how low central banks are able to cut policy rates, and the unconventional measures, especially forward guidance and large scale asset purchase programmes.
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Papers by Markus Haavio