IDEAS home Printed from https://ideas.repec.org/p/zbw/bofrdp/rdp1995_029.html
   My bibliography  Save this paper

The equilibrium exchange rate for the Finnish Markka

Author

Listed:
  • Saarenheimo, Tuomas

Abstract

The purpose of this paper is to analyze the behavior of the equilibrium exchange rate for the Finnish markka in the final years of this century.We construct a small but relatively self contained dynamic macro model that seeks to capture the most essential interdependencies of the Finnish economy.This model is used in calculating the equilibrium paths for nominal exchange rate and domestic activity. The simulations show that with the projected development of foreign demand, trade prices, and domestic wages, the equilibrium exchange rate remains virtually constant over the next four years, at a level very close to the current (mid-1995) exchange rate. That allows for an approximate 4.5 percent non-inflationary average rate of growth.Changes in trade prices and foreign demand only have a modest effect on the equilibrium exchange rate; due to the combination of a non-accommodative inflation constraint and rigid wages, equilibrium is restored primarily by adjusting domestic demand and hence, the growth rate of the domestic economy. The importance of wage moderation is emphasized most dramatically in a scenario in which the rate of wage increases is assumed to exceed the baseline projection by one percent a year.In this scenario, keeping inflation at the target level requires a steady appreciation of the markka and a reduction in the average growth rate to 2.8 percent.

Suggested Citation

  • Saarenheimo, Tuomas, 1995. "The equilibrium exchange rate for the Finnish Markka," Bank of Finland Research Discussion Papers 29/1995, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp1995_029
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/211742/1/bof-rdp1995-029.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Ronald Macdonald, 1995. "Long-Run Exchange Rate Modeling: A Survey of the Recent Evidence," IMF Staff Papers, Palgrave Macmillan, vol. 42(3), pages 437-489, September.
    2. Jacob A. Frenkel & Morris Goldstein, 2017. "A Guide to Target Zones," World Scientific Book Chapters, in: TRADE CURRENCIES AND FINANCE, chapter 5, pages 165-206, World Scientific Publishing Co. Pte. Ltd..
    3. Barrell, Ray & Wren-Lewis, Simon, 1989. "Fundamental Equilibrium Exchange Rates for the G7," CEPR Discussion Papers 323, C.E.P.R. Discussion Papers.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Saarenheimo, Tuomas, 1995. "The equilibrium exchange rate for the Finnish Markka," Research Discussion Papers 29/1995, Bank of Finland.
    2. repec:zbw:bofrdp:1995_029 is not listed on IDEAS
    3. Balázs Égert & László Halpern & Ronald MacDonald, 2006. "Equilibrium Exchange Rates in Transition Economies: Taking Stock of the Issues," Journal of Economic Surveys, Wiley Blackwell, vol. 20(2), pages 257-324, April.
    4. MacDonald, Ronald, 1998. "What determines real exchange rates?: The long and the short of it," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 8(2), pages 117-153, June.
    5. Barisone, Giacomo & Driver, Rebecca L. & Wren-Lewis, Simon, 2006. "Are our FEERs justified?," Journal of International Money and Finance, Elsevier, vol. 25(5), pages 741-759, August.
    6. Su Zhou, 1993. "Fundamental equilibrium exchange rates and exchange rate dynamics," Open Economies Review, Springer, vol. 4(2), pages 189-209, June.
    7. repec:onb:oenbwp:y::i:106:b:1 is not listed on IDEAS
    8. Hervé Joly & Céline Prigent & Nicolas Sobczak, 1996. "Le taux de change réel d'équilibre : une introduction," Économie et Prévision, Programme National Persée, vol. 123(2), pages 1-21.
    9. Cukierman, Alex & Spiegel, Yossi & Leiderman, Leonardo, 2004. "The choice of exchange rate bands: balancing credibility and flexibility," Journal of International Economics, Elsevier, vol. 62(2), pages 379-408, March.
    10. Menzie Chinn & Louis Johnston, 1996. "Real Exchange Rate Levels, Productivity and Demand Shocks: Evidence from a Panel of 14 Countries," NBER Working Papers 5709, National Bureau of Economic Research, Inc.
    11. Apte, Prakash & Sercu, Piet & Uppal, Raman, 2004. "The exchange rate and purchasing power parity: extending the theory and tests," Journal of International Money and Finance, Elsevier, vol. 23(4), pages 553-571, June.
    12. Husted, Steven & MacDonald, Ronald, 1998. "Monetary-based models of the exchange rate: a panel perspective," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 8(1), pages 1-19, January.
    13. Irfan Civcir, 2003. "The Monetary Models of the Turkish Lira/U.S. Dollar Exchange Rate: Long-run Relationships, Short-run Dynamics, and Forecasting," Eastern European Economics, Taylor & Francis Journals, vol. 41(6), pages 43-63, January.
    14. Chinn, Menzie D, 1999. "On the Won and Other East Asian Currencies," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 4(2), pages 113-127, April.
    15. Kateřina Šmídková & Ray Barrell & Dawn Holland, 2003. "Estimates of fundamental real exchange rates for the five eu pre-accession countries," Prague Economic Papers, Prague University of Economics and Business, vol. 2003(4), pages 291-315.
    16. International Monetary Fund, 2005. "Morocco: Selected Issues; Morocco: Selected Issues," IMF Staff Country Reports 05/419, International Monetary Fund.
    17. Jacob A. Frenkel & Morris Goldstein, 1988. "The International Monetary System: Developments and Prospects," Cato Journal, Cato Journal, Cato Institute, vol. 8(2), pages 285-314, Fall.
    18. Rudiger Dornbusch & Jeffrey Frankel, 1988. "The Flexible Exchange Rate System: Experience and Alternatives," International Economic Association Series, in: Silvio Borner (ed.), International Finance and Trade in a Polycentric World, chapter 7, pages 151-208, Palgrave Macmillan.
    19. Guglielmo Maria Caporale & Luis A. Gil‐Alana, 2004. "Fractional cointegration and real exchange rates," Review of Financial Economics, John Wiley & Sons, vol. 13(4), pages 327-340.
    20. MacDonald, Ronald & Marsh, Ian W., 2004. "Currency spillovers and tri-polarity: a simultaneous model of the US dollar, German mark and Japanese yen," Journal of International Money and Finance, Elsevier, vol. 23(1), pages 99-111, February.
    21. Rodrigo Caputo G. & Marco Núñez N. & Rodrigo O. Valdés P., 2008. "Exchange Rate Analysis in Practice," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 11(1), pages 61-91, April.
    22. Husted, Steven & MacDonald, Ronald, 1999. "The Asian currency crash: were badly driven fundamentals to blame?," Journal of Asian Economics, Elsevier, vol. 10(4), pages 537-550.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:bofrdp:rdp1995_029. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/bofgvfi.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.