Exchange Rate Policy: Finnish Experiences
Introduction
The problem of economic instability is particularly pronounced in the case of Finiand. A major and well-recognized cause of the instability is the heavy weight in Finnish exports of a few commodity groups exhibiting strong cyclical fluctuations (like pulp and paper products). There are, however, other reasons for the instability experienced as well. These have to do with, i.a., the “automatic instabiiity” effects of certain deficiencies in the tax system, the generally poor performance of discretionary monetary and fiscal policy and the frequent use of large devaluations to stimulate economic expansion.
This paper focuses on the consequences of exchange rate policy for macroeconomic stability. The structure of the paper is as follows. First we present some factual evidence for the case of Finland which illuminate the effects of exchange rate changes on inflation and competitiveness as well as on output and employment. Then we briefly summarize the history of the Finnish devaluations as well as the discussion of the so called “devaluation cycle”, which has led to a critical reappraisal of the devaluationist strategy. Finally, we set out some of the arguments which are now being used to support the proposition that the primary use of exchange rate policy in a small and open economy like Finland should be to offset foreign inflationary disturbances.
- ISSN: 0357-9603
- ISBN: 951-9281-21-5
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