When the economic effects of fiscal or other policies are examined, it is essential that the analysis model takes into account the most important country-specific transmission channels. In different countries and different circumstances, the effects of the same policy may differ in magnitude or even in direction.
This is evident from the doctoral dissertation written by Meri Obstbaum, M.Sc. (Econ. & Bus. Admin.) for the Aalto University School of Economics. In her dissertation, Obstbaum developed a macroeconomic model that can be used for the analysis of fiscal policy in a small monetary union member state, such as Finland.
The subject is topical at a time when many European countries have resorted to extensive fiscal stimulus to counter the negative impact of the financial crisis on the real economy. In recent years, the attention has focused on how the large debts resulting from this policy could be eliminated.
Increasing government spending through taxes may lead to higher unemployment
According to the results, stabilisation of government debt by increasing taxes on earned income will lead to less private consumption and more unemployment. Wage rigidity may make fiscal stimulus effective in the short run but in the longer run it will have a negative impact on general economic performance.
Unlike in previous research, Obstbaum focuses on the interaction between fiscal policy, taxation and the labour market. In her study, she makes use of important advances in macro theory in recent years, namely the incorporation of the theory of unemployment and wage rigidity in the overall economic framework. As a result, the effects of fiscal policy can be explained through the functioning of the labour market in a manner that could not have been possible with standard models.
Benefits of fiscal policy may be short-lived
The results lend credence to the widely held belief that membership in a monetary union fundamentally changes the adjustment mechanisms of the economy. For example, for a small monetary union member state, fiscal policy is more effective in the short run because the resulting price increase will not lead to a tightening of the common monetary policy.
Obstbaum also examines the parameters determining the adjustment of the Finnish economy. According to the findings, wage rigidity is an essential feature when describing the cyclical variations of the Finnish economy. Labour market shocks such as unexpected changes in wage negotiations, job security and recruitment processes, explain cyclical fluctuations in not only employment but also production.
Since the model produced by Obstbaum describes the functioning of the Finnish economy, it can also be used for evaluating many other policies.
Public examination of the doctoral dissertation
The doctoral dissertation of Meri Obstbaum, M.Sc. (Econ. & Bus. Admin.), Essays on Labour Market Frictions and Fiscal Policy, in the field of economics will be examined on Friday 7 September at 12:15 pm at the Aalto University School of Economics (Main Building, Assembly Hall, Runeberginkatu 14-16, Helsinki).
Representatives of the media may request free copies of the dissertation from the Aalto University School of Economics Communications Unit, viestinta-econ(at)aalto.fi or tel. +358 50 566 5673. The dissertation can be ordered for a charge by email from: toolo(at)ayy.fi. The dissertation is available as a PDF file at: http://epub.lib.aalto.fi/pdf/diss/Aalto_DD_2012_105.pdf
Head of Research at the Bank of Finland, Jouko Vilmunen, Ph.D. (Econ.), will act as opponent and Professor Pertti Haaparanta as custos.
Further information: Meri Obstbaum, tel. +358 29 553 0050, meri.obstbaum@vm.fi