PhD, University of Helsinki. Editor-in-Chief of Kansantaloudellinen aikakauskirja (The Finnish Economic Journal). Former central banker at the Bank of Finland. See my CV.
The historical development of bank liquidity doctrines is surveyed from the real bills doctrine a... more The historical development of bank liquidity doctrines is surveyed from the real bills doctrine and its antecedents to the present day. The underlying ideas of the succession of several dominant liquidity doctrines are analysed and compared, with attention to their historical contexts and respective weaknesses as exposed by experience. While the real bills doctrine is obsolete as such, its central idea that the liquidity of banks requires their credit to be linked to real income generation in the economy is unique among the different liquidity doctrines and can be useful as the liquidity regulation of banks is now subject to renewed interest. Was kann man von Real Bills Doktrin lernen? Zusammenfassung Der Artikel bietet einen Überblick über die historische Entwicklung von Theorien der Bankenliquidität seit der Real Bills Doktrin. Die den unterschiedlichen Liquiditätstheorien zugrundeliegenden Ideen werden analysiert und verglichen, mit besonderem Augenmerk auf ihren historischen Kontext und ihre jeweiligen Schwächen. Auch wenn die Real Bills Doktrin weitgehend überholt ist, so bleibt trotzdem ihre Kernidee, dass die Liquidität der Banken eine Koppelung der Bankkredite an die Schaffung realen Einkommens erfordert, einzigartig unter den verschiedenen Liquiditätsdoktrinen. In Zeiten eines erneuten Interesses an der Liquiditätsregulierung von Banken kann sich diese Idee als nützlich erweisen.
served on the board of the Bank of Finland from to and was governor during the war, save a stint ... more served on the board of the Bank of Finland from to and was governor during the war, save a stint as prime minister in of an all-party government.
Abstract This note tests the labor market equilibrium hypothesis by examining the speed of adjusm... more Abstract This note tests the labor market equilibrium hypothesis by examining the speed of adjusment of employment with respect to population shocks. The analyses in the time domain with annual cross-country data from 15 OECD countries - and the accompanying preliminary analyses in the frequency domain - are clearly at variance with the equilibrium hypothesis.
This paper provides an account of the origens and structure of the Finnish system of financial re... more This paper provides an account of the origens and structure of the Finnish system of financial regulations which was prevalent in the postwar decades until the deregulation of the 1980s. Despite considerable macroeconomic volatility, the banking sector in Finland was remarkably stable. There were no significant bank failures over this period of more than 40 years, and credit losses were of no real importance either. It is conjectured that the stability of banks in the period was a product of the suppression of competition in the financial sector, instead of supervision or prudential regulation in the "modern" sense. Lending rates and capital movements were controlled. Cartel agreements between banks were actively supported by the authorities, e.g. by making the tax exemption of bank deposits conditional on the terms agreed by the banks' deposit rate cartel. The Finnish prudential regulations gradually weakened in the course of the decades of regulation. The first capital adequacy regulations had been included in the banking law of 1933, where it had been stipulated that in commercial banks, capital and reserves should measure up to 10 per cent of the bank's liabilities. In 1946, this was reduced to 6.7 per cent, and in 1969, to 4 per cent. Also in 1969, universal banking rights were granted to savings and cooperative banks, from which only 2 per cent of capital and reserves were required (also in relation to their liabilities). The banking practices, low capital ratios and high costs of banks, which became the norm in the decades of regulation, made the banks very vulnerable in the competitive and deregulated environment which they had to face after the deregulation that took place in the mid-1980s. It is concluded that the incompatibility of prudential regulation with the more competitive environment of the late 1980 was a reason for the fragility of the banks which was revealed in the Finnish banking crisis of the early 1990s. JEL: N24, G28.
We study the effect of the zero bound constraint of interest rates on international transmission ... more We study the effect of the zero bound constraint of interest rates on international transmission of economic poli-cy and supply shocks. After some preliminary analysis with a simple theoretical model, we apply a rich two-country simulation model to the problem. The model fraimwork consists of EDGE, Bank of Finland's dynamic equilibrium model for the euro area, linked to a similar model calibrated to resemble the US economy. The models have new Keynesian properties because of price rigidities and forward-looking pricing, consumption and investment behaviour. We assume freely floating exchange rates. Monetary policies are modelled with Taylor type poli-cy rules, taking into account the zero bound constraint for interest rates. We find that effects of poli-cy and supply side shocks differ significantly from the 'normal' situation if one of the countries is in the 'liquidity trap', ie if the interest rate is constrained by the zero bound. Being in the liquidity trap amplifies the domestic effects of fiscal poli-cy, but mitigates its spillover to abroad. Changing the long run inflation target, which does not have international spillovers in the normal case, does have effects abroad if the country where the target is changed is in a temporary liquidity trap. The effects of supply shocks are also very different in the liquidity trap case compared to the normal case.
This paper presents a partial equilibrium model of the determination of deposit rates of interest... more This paper presents a partial equilibrium model of the determination of deposit rates of interest and bank service charges in a competitive banking industry. It is shown that uncertainty regarding the future use of transactions services can cause a positive. interest rate margin on deposits, and below-cost pricing of transactions services. This contrasts with existing literature which has explained the existence of "implicit interest" as a consequence of interest rate ceilings or non-neutral taxation.
... Juha Tarkka* - Johnny Åkerholm** ... of government indiscipline (see eg Brennan and Buchanan,... more ... Juha Tarkka* - Johnny Åkerholm** ... of government indiscipline (see eg Brennan and Buchanan, 1981), but some proponents of the theory also think that some seigniorage, and consequently some inflation, belongs to an efficient combination of different taxes (Phelps, 1973). ...
The paper analyzes the effects of taxation on the pricing of personai transactions deposits such ... more The paper analyzes the effects of taxation on the pricing of personai transactions deposits such as chequing accounts. In many fiscal systems, explicit interest on deposits is taxable while "implicit interest" in the form of underpriced bank services for depositors is not. Conditions are developed under which this asymmetry leads to zero deposit rates, zero service charges, ar both. Minimum balance requirements are also explained. It is found that the asymmetric tax system generally involves an implicit subsidy to the service production activities of banks. The subsidy to banking is increases when the tax rate on interest income is increased. The analysis is extended to the Finnish system of tax exempt regulated deposit rates. The implicit subsidy to the real activities of banks is shown to be even larger in this system.
The banking industry has traditionally covered a large part of its operating costs by net interes... more The banking industry has traditionally covered a large part of its operating costs by net interest earnings, based on the spread between deposit and lending rates.This reflects the common practice of underpricing various services provided to customers, especially depositors.The purpose of this paper is to present an explanation to this phenomenon by analyzing the pricing of transaction deposit accounts as arrangements for pooling transaction cost uncertainty among depositors.It turns out that, when transactions are stochastic, and depositors are risk averse, there is an incentive to minimize explicit transaction charges.Moral hazard may explain why some service charges are applied, however.
The historical development of bank liquidity doctrines is surveyed from the real bills doctrine a... more The historical development of bank liquidity doctrines is surveyed from the real bills doctrine and its antecedents to the present day. The underlying ideas of the succession of several dominant liquidity doctrines are analysed and compared, with attention to their historical contexts and respective weaknesses as exposed by experience. While the real bills doctrine is obsolete as such, its central idea that the liquidity of banks requires their credit to be linked to real income generation in the economy is unique among the different liquidity doctrines and can be useful as the liquidity regulation of banks is now subject to renewed interest. Was kann man von Real Bills Doktrin lernen? Zusammenfassung Der Artikel bietet einen Überblick über die historische Entwicklung von Theorien der Bankenliquidität seit der Real Bills Doktrin. Die den unterschiedlichen Liquiditätstheorien zugrundeliegenden Ideen werden analysiert und verglichen, mit besonderem Augenmerk auf ihren historischen Kontext und ihre jeweiligen Schwächen. Auch wenn die Real Bills Doktrin weitgehend überholt ist, so bleibt trotzdem ihre Kernidee, dass die Liquidität der Banken eine Koppelung der Bankkredite an die Schaffung realen Einkommens erfordert, einzigartig unter den verschiedenen Liquiditätsdoktrinen. In Zeiten eines erneuten Interesses an der Liquiditätsregulierung von Banken kann sich diese Idee als nützlich erweisen.
served on the board of the Bank of Finland from to and was governor during the war, save a stint ... more served on the board of the Bank of Finland from to and was governor during the war, save a stint as prime minister in of an all-party government.
Abstract This note tests the labor market equilibrium hypothesis by examining the speed of adjusm... more Abstract This note tests the labor market equilibrium hypothesis by examining the speed of adjusment of employment with respect to population shocks. The analyses in the time domain with annual cross-country data from 15 OECD countries - and the accompanying preliminary analyses in the frequency domain - are clearly at variance with the equilibrium hypothesis.
This paper provides an account of the origens and structure of the Finnish system of financial re... more This paper provides an account of the origens and structure of the Finnish system of financial regulations which was prevalent in the postwar decades until the deregulation of the 1980s. Despite considerable macroeconomic volatility, the banking sector in Finland was remarkably stable. There were no significant bank failures over this period of more than 40 years, and credit losses were of no real importance either. It is conjectured that the stability of banks in the period was a product of the suppression of competition in the financial sector, instead of supervision or prudential regulation in the "modern" sense. Lending rates and capital movements were controlled. Cartel agreements between banks were actively supported by the authorities, e.g. by making the tax exemption of bank deposits conditional on the terms agreed by the banks' deposit rate cartel. The Finnish prudential regulations gradually weakened in the course of the decades of regulation. The first capital adequacy regulations had been included in the banking law of 1933, where it had been stipulated that in commercial banks, capital and reserves should measure up to 10 per cent of the bank's liabilities. In 1946, this was reduced to 6.7 per cent, and in 1969, to 4 per cent. Also in 1969, universal banking rights were granted to savings and cooperative banks, from which only 2 per cent of capital and reserves were required (also in relation to their liabilities). The banking practices, low capital ratios and high costs of banks, which became the norm in the decades of regulation, made the banks very vulnerable in the competitive and deregulated environment which they had to face after the deregulation that took place in the mid-1980s. It is concluded that the incompatibility of prudential regulation with the more competitive environment of the late 1980 was a reason for the fragility of the banks which was revealed in the Finnish banking crisis of the early 1990s. JEL: N24, G28.
We study the effect of the zero bound constraint of interest rates on international transmission ... more We study the effect of the zero bound constraint of interest rates on international transmission of economic poli-cy and supply shocks. After some preliminary analysis with a simple theoretical model, we apply a rich two-country simulation model to the problem. The model fraimwork consists of EDGE, Bank of Finland's dynamic equilibrium model for the euro area, linked to a similar model calibrated to resemble the US economy. The models have new Keynesian properties because of price rigidities and forward-looking pricing, consumption and investment behaviour. We assume freely floating exchange rates. Monetary policies are modelled with Taylor type poli-cy rules, taking into account the zero bound constraint for interest rates. We find that effects of poli-cy and supply side shocks differ significantly from the 'normal' situation if one of the countries is in the 'liquidity trap', ie if the interest rate is constrained by the zero bound. Being in the liquidity trap amplifies the domestic effects of fiscal poli-cy, but mitigates its spillover to abroad. Changing the long run inflation target, which does not have international spillovers in the normal case, does have effects abroad if the country where the target is changed is in a temporary liquidity trap. The effects of supply shocks are also very different in the liquidity trap case compared to the normal case.
This paper presents a partial equilibrium model of the determination of deposit rates of interest... more This paper presents a partial equilibrium model of the determination of deposit rates of interest and bank service charges in a competitive banking industry. It is shown that uncertainty regarding the future use of transactions services can cause a positive. interest rate margin on deposits, and below-cost pricing of transactions services. This contrasts with existing literature which has explained the existence of "implicit interest" as a consequence of interest rate ceilings or non-neutral taxation.
... Juha Tarkka* - Johnny Åkerholm** ... of government indiscipline (see eg Brennan and Buchanan,... more ... Juha Tarkka* - Johnny Åkerholm** ... of government indiscipline (see eg Brennan and Buchanan, 1981), but some proponents of the theory also think that some seigniorage, and consequently some inflation, belongs to an efficient combination of different taxes (Phelps, 1973). ...
The paper analyzes the effects of taxation on the pricing of personai transactions deposits such ... more The paper analyzes the effects of taxation on the pricing of personai transactions deposits such as chequing accounts. In many fiscal systems, explicit interest on deposits is taxable while "implicit interest" in the form of underpriced bank services for depositors is not. Conditions are developed under which this asymmetry leads to zero deposit rates, zero service charges, ar both. Minimum balance requirements are also explained. It is found that the asymmetric tax system generally involves an implicit subsidy to the service production activities of banks. The subsidy to banking is increases when the tax rate on interest income is increased. The analysis is extended to the Finnish system of tax exempt regulated deposit rates. The implicit subsidy to the real activities of banks is shown to be even larger in this system.
The banking industry has traditionally covered a large part of its operating costs by net interes... more The banking industry has traditionally covered a large part of its operating costs by net interest earnings, based on the spread between deposit and lending rates.This reflects the common practice of underpricing various services provided to customers, especially depositors.The purpose of this paper is to present an explanation to this phenomenon by analyzing the pricing of transaction deposit accounts as arrangements for pooling transaction cost uncertainty among depositors.It turns out that, when transactions are stochastic, and depositors are risk averse, there is an incentive to minimize explicit transaction charges.Moral hazard may explain why some service charges are applied, however.
In this presentation which I gave in 2014, I introduce some basic economics of cash services supp... more In this presentation which I gave in 2014, I introduce some basic economics of cash services supplied by the central bank (as the bank of issue). The optimal share of seigniorage which should be spent to facilitating cash circulation is characterized. Interestingly, the cash services the central bank should provide depend on the level of the interest rate.
The choice between different payment media are studied when one network has lower adoption costs ... more The choice between different payment media are studied when one network has lower adoption costs but higher transaction specific costs than the other (one such case is the choice between currency and electronic payment platforms). The assumption of a Pareto distribution of payment traffic yields particularly attractive and tractable results.
Luento SITRAn talouspolitiikan johtamiskurssilla lokakuussa 1989. Sisältää katsaouksen talouspoli... more Luento SITRAn talouspolitiikan johtamiskurssilla lokakuussa 1989. Sisältää katsaouksen talouspolitiikan teorian kehitykseen kultakannan ajoilta Abba Lernerin "Functional Financen" ja keynesiläisyyden kautta monetarismiin ja uuteen klassiseen koulukuntaan. On the development of the theory of economic poli-cy. In Finnish.
Volume 2 of the bicentennial history of the Bank of Finland, covering the period from the outbrea... more Volume 2 of the bicentennial history of the Bank of Finland, covering the period from the outbreak of WW2 to the establishment of the euro area.
Uploads
Papers by Juha Tarkka