Research Newsletter Online 1/2009



Standard life-cycle and permanent income reasoning suggest that households accumulate assets early in the life cycle in order to secure adequate resources for consumption later in life when income is expected to be lower, for example, due to retirement. This consumption-smoothing phenomenon has greatly influenced the way economists think about the determinants of household debt dynamics.
The extent to which a household is willing to postpone current consumption depends on its preferences, in particular its time preference or subjective real interest rate. For households that have a strong preference for current consumption – impatient households – the real interest rate, by implication, must be particularly high in order to induce them to trade current for future consumption.
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Cyclical credit policy – an empirical test

One of the key issues in the macro-finance literature is to understand to what extent, and through which channels, financial market events are transmitted to the real economy. The currently fashionable DSGE macro-models depend heavily on the assumption of perfect financial markets. But many authors tend to the view that events in the financial markets can have important implications for the real economy. And the ongoing economic crisis has clearly given much credence to this view. For example, the crisis has already been ascribed at least partly to pro-cyclical credit policies.In particular, it has been suggested that lending has been far too lenient during the pre-crisis period and has thus contributed to a build-up of excessive credit risk.
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On the correlation between defaults and losses given default

The role of credit risk in the financial markets has expanded greatly since the 1990s. New markets for financial instruments, such as securitizations and credit default swaps, have made it possible to transfer credit risk from original creditors to other investors. Theoretical advances in modeling credit risk, with applications in pricing and risk management, contributed to this development. Financial regulators also recognized the need to update banks' solvency requirements with respect to credit risk and launched the Basel II capital adequacy reform, which is now in force in the EU, and the USA is expected to follow suit. Yet the current financial crisis, which grew out of subprime mortgages and the fancy financial derivatives partly constructed from them, has demonstrated that understanding and modeling the many relevant aspects of credit risk has been inadequate.
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Specialisation in foreign trade reveals countries' comparative advantage

The structure of a country’s foreign trade says a great deal about the competitiveness of the different sectors, especially if detailed statistics can be compared with corresponding data on other countries. Several BOFIT Discussion Papers published at the end of 2008 examine in detail the foreign trade data for Russia and China. The competitiveness of Russian exports of manufactured goods is studied in respect of three markets: Europe, China and CIS countries. It seems that Russian manufactures are truly competitive only in the CIS countries and that even there their advantage seems to be waning. For China, the situation is vastly different.
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Jouko Vilmunen

Bank of Finland
ISSN 1796-9131

PO Box 160,
FI–00101 Helsinki


Research Newsletter 1/2009 (PDF)