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The Aino 2.0 Model

date Date: May 1, 2016
date Author(s): Juha Kilponen, Seppo Orjasniemi, Antti Ripatti, Fabio Verona
date Affiliation: Bank of Finland
Abstract
The goal of this paper is to present 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 (using Bayesian methods) and how it can be used to interpret the evolution of Finnish economy between 1995 and 2014 including the rise and fall of the electronics industry, the global financial crises and the stagnant growth performance ever since the end of the financial crisis. According to the estimates, the Finnish economy portrays very rigid wage setting and high external habit persistence in consumption, combined with relatively flexible prices. The Finnish business cycle is mainly driven by technology and external shocks, while the shocks originating from the financial sector play a relatively minor role. The model attributes a large part of the rise and fall of the electronics industry and the last years’ stagnant growth performance to technology (i.e. productivity) shocks, shocks to export shares as well as to export demand.

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