External Shocks and Adjustment Policies in Finland 1973–80
Introduction
The 1970s were a period of violent fluctuations. Oil prices multiplied, world markets were severely depressed, exchange rate regimes in a state of flux and international financial markets turbulent. For institutional reasons (relating mostly to Finnish foreign exchange policy), the direct macroeconomic effects of foreign financial developments were limited in the case of Finland. The real shocks, by contrast, were deceisive to the economy’s performance.
In this paper we briefly describe macroeconomic developments in Finland in the 1973–1980 period. We also discuss the role played in the cyclical context by monetary and exchange rate policy.
In section 2 we review some major external shocks and domestic imbalances that formed the setting for policy choices. The Finnish experience is differentiated from that of most other market economies in Europe mainly by some consequences of its structure of foreign trade. Economic policies adopted to adjust the economy to external disturbances were of course also significant.
In section 3 we turn to the role played by monetary policy. In particular, we analyze the significance of developments in the balance of payments for the determination of the stance of monetary policy. We find that the “autonomy” of Finnish monetary policy has not been seriously hampered by interest sensitive capital flows (nor by difficulties in financing current account deficits). Nevertheless, monetary conditions were largely conditioned by developments in the balance of payments because of automatic and policy induced effects.
In section 4, finally, we intend to characterize and analyse the consequences of the active exchange rate policies pursued in Finland (since 1973 as well as before). Our assessment focusses particularly on the dynamic effects of exchange rate changes on competitiveness and inflation. In addition, we discuss the potential macroeconomic advantages of some currency standards alternative to the “currency basket standard” presently employed in Finland. For these purposes we partly draw on some simulations with a small macroeconomic model from an earlier study. (The empirical model used in the simulations is compactly presented in an appendix to this paper.) Section 5 concludes with some brief reflections on the lessons for policy assignments in the Finnish context that the experiences of the 1970s in our view contain.
- ISSN: 0357-9603
- ISBN: 951-9281-29-0
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