How are the key Finnish market interest rates determined?

Finnish money markets have undergone profound changes in recent years. In particular, the transition to a more market oriented system has changed the way domestic interest rates are formed. This paper presents and quantifies one way of describing the structure and main linkages of the current setting. Key elements of the model are the dependence of the domestic market interest rates on the foreign interest rate, an explicit formulation of the dependence of the domestic short-term market interest rate on purely domestic factors, and explicit considerations of various institutional features of the domestic money market. Empirical evidence on the formation of the domestic short-term and long-term market interest rates as well as short-term and long-term lending rates is presented, and the results are broadly consistent with the theoretical structure of the model.