You may download some of my recent papers.
by Juha Kilponen, Seppo Orjasniemi, Antti Ripatti and Fabio Verona
Bank of Finland Discussion Paper 16/2016
This paper presents Aino 2.0 – the dynamic stochastic general
equilibrium (DSGE) model currently used at the Bank of Finland for
forecasting and policy analysis. The paper provides a detailed
theoretical description of the model, its estimation and how it can be
used to interpret the evolution of the Finnish economy between 1995 and
2014, including the rise and fall of the electronics industry, the
global financial crisis, and the stagnant growth performance since the
end of the financial crisis.
by Markus Haavio, Antti Ripatti and Tuomas Takalo
Bank of Finland Discussion Paper 12/2016
(This is a revised version of the paper "Macroeconomic Effects of Bank Recapitalizations")
We build a dynamic stochastic general equilibrium model, where the
balance sheets of both banks and non-financial firms play a role in
macro-financial linkages. We show that in equilibrium bank capital tends
to be scarce, compared with firm capital. We study public funding of
banks and firms in times of crisis. Government capital injections can be
useful as a shock cushion, but they distort incentives. Small capital
injections benefit banks more than firms but the relative benefit is
declining in the injection size. Government should first recapitalize
banks, and if resources are large enough, lend to firms too.
by Markus Haavio, Antti Ripatti and Tuomas Takalo
build a dynamic stochastic general equilibrium model where investments
by entrepreneurs and banks can be leveraged by external funding but are
subject to a dual moral hazard problem. In our model banks' monitoring
investments have a variable scale and real opportunity cost. As a
result, the monitoring investments vary over the business cycle which
implies that not only the aggregate amount bank capital and
entrepreneurial wealth but also their composition matters in the
propagation of shocks. We show that in equilibrium bank capital is
scarce and that it greatly amplifies the investment shocks but dampens
many other type of shocks. We also 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.
by Martin Ellison, Markku Lanne, Antti Ripatti and Pentti Saikkonen
show that U.S. inflation depends more on the future than on the past in
a range of estimated macroeconomic models. This non-causality result is
problematic for macroeconomists trained in causal models, since they
assume by definition that inflation only depends on current shocks and
past information. Even models with rational forward-looking agents are
causal as expectations are themselves only a function of the past. Our
finding that U.S. inflation data prefers time to run backwards suggests
that the models we estimate are misspecified. The focus of this paper
is the econometrician's information set. We show that inflation depends
more on the future than the past if the information set of the
econometrician does not span that of firms in the economy. To combat
this missing variable problem we expand the information set of the
econometrician to include measures of the output gap, interest rates,
and factors identi?ed as principal components of a large dataset of
economic indicators. The resulting Phillips curve and factor-augmented
vector autoregression models still show strong dependency of U.S.
inflation on the future. We therefore conclude that non-causal
inflation is pervasive and firms know a lot more about the future than
we typically assume.
Estimated DSGE Model of the Finnish Economy: Ainoby Mika Kortelainen and Antti Ripatti
specify a dynamic stochastic general equilibrium model of the Finnish
economy. The model contains nominal frictions in prices and wages and
real frictions in the form of habit persistence, investment adjustment
costs, and the adjustment costs of import shares. The production relies
on the constant elasticity of substitution form in combining capital
and labour. This allows us using Harrod-neutral technical change. The
monetary policy portrays Finland's small size relative to the euro
area. Both the euro area (EUR) and the rest-of-the-world (ROW) interest
rates are exogenously given. The foreign exchange rate vis-a-vis euro
is fixed. The parameters of the model are estimated with Bayesian
methods using the log-linearized version of the model. The Finnish
economy portrays surprisingly modest nominal rigidities. Many estimated
shock processes show very strong persistence. Model forecast
performance is reasonable and is, sometimes, contaminated by the
persistent shock processes.
Demographic Uncertainty and Labour Market
Imperfections in a Small Open Economy
Juha Kilponen, Helvi Kinnunen and Antti Ripatti
This paper extends Gertler's (1999) tractable overlapping generations model
by allowing for imperfect labour markets and distortionary taxation. Further-
more, we allow for stochastic variation in demographic structure. The model is
then used to study demographic change in a small open economy of Finland.
The simulations highlight a key role played by labour market imperfections
in determining a fiscal burden of ageing in defined benefit pensions systems.
Higher labour market imperfections lead into considerably stronger responses
of labour supply and taxes on ageing. Thus, imperfections magnify the prob-
lem associated with .scal sustainability in ageing society. Stochastic simulations
suggest that lengthening of working time has rather minor impact on alleviat-
ing the fiscal burden of ageing: Only a small fraction of stochastic variation in
endogenously determined contribution rate is explained by the stochastic vari-
ation in the length of working time. Variation in fertility rate is clearly much
Download paper in PDF form.
JEL: E62, E27, H55
Learning to Forecast with a DGE Model
Juha Kilponen and Antti Ripatti
The Bank of Finland has used a newly built D(S)GE model (Aino
model) as its main forecasting tool since August 2004. A common fore-
casters’ prejudice is that DSGE models are difficult to use and their
data coherence is very low. In this paper we provide contradicting view.
We describe the Aino model, its forecasting related modifications, and
collect experiences in the use of the model. A succesfull forecasting tool
need to digest expert information while retaining its theoretical consis-
tency, i.e. it has to incorporate judgement without relaxing story telling
features. Aino’s design is based on this prerequisite. It makes use of
Harrod neutral technical change within CES aggregators and allow many
preference and technology parameters to be time-varying. These choices
are key to fullfill practical needs of forecasting with a D(S)GE model.
JEL: E60, C68
Download paper in PDF form.
Juha Kilponen and Antti Ripatti
Using a DSGE model of a small open economy we study the response of the economy
and income tax rate, in particular, to the reforms in the labour and product markets.
The model is non-Ricardian due to the distortionary taxation and built-in life-cycle
features. We assume that the wage markup and the price margins are reduced by one
per cent each. Both consumption and employment increase permanently. The public
sector balances improve, allowing for roughly 1 percentage point cut in labour income
taxes. Product market reform leads to a short-run reduction in consumption, leading
to an intertemporal tradeoff in reform setting. More activist fiscal policy can dampen
Key words: competition, dynamic general equilibrium, public finance
JEL classification numbers: E60, C68
This is a substantially revised version of an old discussion paper.
by Jukka Jalava (Pellervo Economic Research
Institute and Helsinki School of Economics),
Matti Pohjola (Helsinki School of
Economics and HECER), Antti Ripatti (Bank of Finland) and Jouko Vilmunen (Bank
of Finland). HECERTopics in Macroeconomics: Vol. 6: No. 1, Article 8.
The paper argues that a Cobb-Douglas specification may be a reasonable
description of the Finnish aggregate production function when a
sufficiently long time period (the 20th century) is considered. It is,
however, a misleading description of the production technology for the
post-WWII period. Controlling for biased technical change, the
elasticity of substitution is significantly below one, close to 0.5,
during 1945-2003. Given that similar results have been obtained for the
U.S. economy, the analysis shows that the value of the elasticity of
substitution cannot be dependent on some specific structure of economic
institutions but is likely to reflect more general aspects of
technology and production. JEL Classification: O3, O4
Keywords: capital-labour substitution, elasticity of substitution, technical
Download paper in PDF form.
Declining Labour Share --- Evidence of a Change in the Underlying Production Technology?
by Antti Ripatti and Jouko Vilmunen (Bank of Finland). Bank of Finland
Discussion Paper 10/2001.
The study demonstrates that the decline in the labour share in
Finland can not be explained by the Cobb-Douglas production function.
Instead, we propose an approach based on the constant-elasticity-of-substitution (CES)
production function with labour- and capital-augmenting technical progress.
The model is augmented by imperfect competition in the output market.
According to the empirical results based on estimation of the first-order-conditions,
the technical elasticity of substitution is significantly less than
unity (0.6) and hence the Cobb-Douglas production function is rejected.
The growth rate of the estimated labour-augmenting technical progress has
decreased in recent years, which is not consistent with the 'new-economy'
hypothesis. Capital-augmenting technical trend has exploded during
the same period, which provides a possible explanation for the rapid
growth of the Solow residual. The main contributing factor behind
the declining labour share is, however, the increasing mark-up.
Download paper in PDF form.
On the Estimation of Euler Equations in the Presence
of a Potential Regime Shift
by Pentti Saikkonen (University of Helsinki) and Antti Ripatti (Bank of Finland)
Published (2000) in The Manchester School, 68, S1, pp. 92 - 121.
Earlier version as the Bank of Finland Discussion Paper 6/99.
The concept of a peso problem is formalized in terms of a linear Euler equation
and a nonlinear marginal model describing the dynamics of the exogenous driving
process. It is shown that, using a threshold autoregressive model as a marginal
model, it is possible to produce time-varying peso premia. A Monte Carlo method
and a method based on the numerical solution of integral equations are considered
as tools for computing conditional future expectations in the marginal model. A
Monte Carlo study illustrates the poor performance of the generalized method of
moment (GMM) estimator in small and even relatively large samples. The poor
performance is particularly acute in the presence of a peso problem but is also
serious in the simple linear case.
Keywords: peso problem, Euler equations, GMM, threshold autoregressive
Download discussion paper version in PDF form (1677 kB).
Cointegrated Vector Autoregressive Processes
with Continuous Structural Changes
by Antti Ripatti and Pentti Saikkonen, Bank of Finland. Published in (1999)
Journal of Business & Economic Statistics, 17, 2, p. 195-205.
Revised version of the Bank of Finland Discussion Paper 29/98. Revised in 27 October 1999.
We extend the conventional cointegrated VAR model to allow for general
nonlinear deterministic trends. These nonlinear trends can be used to model
gradual structural changes in the intercept term of the cointegrating relations. A
general asymptotic theory of estimation and statistical inference is reviewed and a
diagnostic test for testing the correct specification of an employed nonlinear trend
is developed. The methods are applied to Finnish interest rate data. A smooth
level shift of the logistic form between the own-yield of broad money and the
short-term money market rate is found appropriate for these data. The level shift is
motivated by the deregulation of issuing certificates of deposit and its inclusion in
the model solves the puzzle of ‘missing cointegration vector’ found in a previous
Keywords: cointegrated VAR model, gradual structural change, nonlinear
Download paper in PDF form (210 kB).
Inflation Targeting and the Role of Money in a Model with Sticky
Prices and Sticky Money
by Antti Ripatti, Bank of Finland. 6 October 1998, Corrected version of the
Bank of Finland Discussion Paper 17/97.
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 for
velocity shocks and stochastic `technology' shocks in prodution. We
show that conditioning the interest rate on the expected future
technology change can be used to achieve constant inflation or constant
inflation expectations. However, the prediction of technology growth
could be a heroic task. The assumed adjustment costs in 'money demand'
lead to an equilibrium in which inflation can be controlled by money
growth without having information on the current state of the economy. Finally,
the tradeoff between money and the interest rate as a monetary policy
instrument depends on the parameteric stability of the technology change
process relative to that of the 'money demand' function.
Download paper in PDF form (639 kB).
Limited and Full Information Estimation
of the Rational Expectations Demand for Money Model:
Application to Finnish M1
by Antti Ripatti, Bank of Finland, 6 October 1998. This is a substantially revised version of the Bank of Finland Discussion
We compare parameter estimates of the intertemporal
money-in-the-utility-function model estimated using the Generalized
Method of Moments and Full Information Maximum Likelihood method. The
process driving the forcing variables is approximated with
vector-autoregression. Both the GMM and FIML parameter estimates are
reasonable, and their difference is negligible. This is confirmed by the
numerical experiments. However, the standard errors of the parameters
differ widely. The cross-equation restrictions implied by the
rational expectations hypothesis are clearly rejected, as is typical for
these kinds of models; exogeneity restrictions are rejected as well.
Download paper in PDF form (837 kB).
Stability of the Demand for M1 and Harmonized M3 in Finland
by Antti Ripatti, Bank of Finland, 6 October 1998. Paper published in Empirical Economics,
Vol 23, Issue 3, 1998.
We derive a theoretical model for the demand for money using the
adjustment cost augmented money-in-the-utility-function approach. The
steady-state - utility function - parameters of the model of narrow
money (M1) estimated with cointegration techniques are stable over the
foreign exchange rate regime shift; whereas in the model of harmonized
M3 (M3H) they are not stable. The theoretical model fits the M1
data. The adjustment cost parameters of the M1 model describing the
dynamics of the demand for money might indicate technological
improvements in banking and payments during the sample period. The
adjustment cost parameters of the M3H model are not stable. These
results suggest that from the Finnish point of view M1 would be a more
appropriate intermediate target for monetary policy than harmonized M3.
Download paper in PDF form (729 kB),
- Antti Ripatti(1999): Comments on 'The Exchange Rate and the Monetary Transmission Mechanism in Germany' by Frank Smets and Raf Wouters, DNB Staff Reports 1999, No. 35.
- Luukkonen Ritva, Antti Ripatti and Pentti Saikkonen (1997): Testing for a Valid Normalization of Cointegrating Vectors in Vector Autoregressive Processes, forthcoming in Journal of Business and Economic Statistics.
- Pikkarainen, Pentti and Antti Ripatti (1995): The role of monetary indicatorsin the design of monetary policy, Bank of Finland Bulletin, vol 69, No 8, August.
- Antti Ripatti and Jouko Vilmunen (1995): Relative Prices and Monetary Policy Information Variables: Long Run Evidence From Finland, Bank of Finland Discussion Papers 32/95.
- Antti Ripatti(1995): Leading Inflation Indicators in Finland: Pairwise Analysis of Granger-Causality and Cointegration,
Bank of Finland Discussion Papers 24/95. Presentation in conference
"Money, Foreign Exchange and Capital Markets", Valletta, Malta
- Antti Ripatti (1994): Econometric Modelling of the Demand for Money in Finland, Bank of Finland D:79. Licenciate thesis.
- Antti Ripatti (1992): Demand for Money, Bank of Finland, BULLETIN, 7.12.1992
- Antti Ripatti (1992): On the Stability of the Demand for Money, the Case of Finland, Presentation in Symposium of Finnish Economists, 11.02.1992
- Antti Ripatti (1991): Raakapuun kysyntä ja tarjonta Suomessa, Esitelmä kansantaloustieteen päivillä. Moniste, 11.02.1991, in Finnish. (Demand for Roundwood in Finland)
- Antti Ripatti (1991): Teollisuuden keskusliiton suhdannebarometrin käyttö ETLAssa, Teollisuuden keskusliiton 100. Suhdannebarometri, artikkeli, 23.1.1991, in Finnish. (The Use of Industrial Surveys in ETLA)
- Antti Ripatti (1990): Raakapuun kysyntä ja tarjonta Suomessa, Empiirinen tutkimus pitkän aikavälin riippuvuuksista,
Master's thesis, Department of Economics, University of Helsinki,
7.11.1990, in Finnish. (Demand for and Supply of Roundwood in Finland:
Empirical Study on the Long Run Relationships)
- Kuitunen, Tero, Ripatti, Antti and Mika Widgrén (1990): Outlook for manufacturing industries, Finnish Economy, no 4.
- Antti Ripatti - Pekka Ylä-Anttila (1990): Suuryritykset keskittyvät pienet säilyvät, Talouselämä -lehti, 28/1990, in Finnish (Bigs Get Bigger, the Structure of Firm Size in Finland)
- Antti Ripatti - Pentti Vartia - Pekka Ylä-Anttila (1989): Suomen talouden ja yritysrakenteen muutokset 1938-1988, ETLA keskusteluaiheita No 297, 11.9.1989, in Finnish (Structural Changes in Finnish Economy)
- Antti Ripatti (1986): Teollisuustilaston ja ulkomaankauppatilaston yhdisteen hyödyntäminen, ETLA Keskusteluaiheita 202, 20.3.1986, in Finnish. (Combining Industrial Statistics with Foreign Trade Statistics)
Work-in-progressUnpacking Eurosystem Forecasts (joint with Michal Andrle)
Anticipated Fiscal Shocks
My Home Page
Last update 1 September 2008
© 1997-1998 Antti Ripatti