Has monetary policy been too tight for Finland?

The article examines the suitability of ECB monetary policy for Finland using the Taylor rule. The Taylor rule derives the optimal policy rate on the basis of inflation and the output gap.

A historical analysis shows that the ECB’s interest rate level has most often been reasonably appropriate for Finland. In the 2010s, extremely accommodative monetary policy was justified by Finland’s prolonged weakness. In the 2020s, rapid inflation raised the optimal interest rate level, and the current rate level is close to the level derived from the Taylor rule. From Finland’s perspective, interest rate increases are harmful given the combination of weak economic growth and public finance adjustment needs, but an independent monetary policy is not available within the eurozone. (AI translation)

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