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The currency band and credibility : The Finnish experience


  • Lehmussaari, Olli-Pekka
  • Suvanto, Antti
  • Vajanne, Laura


This paper examines developments in the Finnish money and foreign exchange markets in the light of the recent literature on target-zones. The basket-pegging system, which was officially adopted in Finland in late 1977, provides a good opportunity to discuss some of the implications of the target-zone models. Analysis concentrates on the period after 1987 when the assumptions underlying the basic target-zone model can assumed to be fulfilled. Although empirical exchange rate distributions of the Finnish markka do not seem to resemble those predicted by the basic target-zone model, the findings of the paper support the view that for a given period Finnish data exhibit some of the implications of target-zone models. The results, however, indicate that causality rons from the interest rate differential to the exchange rate and not from the exchange rate to the interest rate differential as implied by the basic (credible) target-zone model. In addition, intervention practices carried out by the central bank appear to have played an important role in determining the expected future exchange rate within the currency band.

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  • Lehmussaari, Olli-Pekka & Suvanto, Antti & Vajanne, Laura, 1992. "The currency band and credibility : The Finnish experience," Research Discussion Papers 37/1992, Bank of Finland.
  • Handle: RePEc:bof:bofrdp:1992_037

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    References listed on IDEAS

    1. Tarkka, Juha & Åkerholm, Johnny, 1992. "Fiscal federalism and European monetary integration," Research Discussion Papers 2/1992, Bank of Finland.
    2. Lars E. O. Svensson, 1991. "The Simplest Test of Target Zone Credibility," IMF Staff Papers, Palgrave Macmillan, vol. 38(3), pages 655-665, September.
    3. Koskela, Erkki & Virén, Matti, 1992. "Inflation, capital markets and household saving in Nordic countries," Research Discussion Papers 4/1992, Bank of Finland.
    4. Lindberg, H. & Svensson, L.E. & Soderlind, P., 1991. "Devaluation Expectations: the Swedish Krona 1982-1991," Papers 495, Stockholm - International Economic Studies.
    5. Starck, Christian & Virén, Matti, 1992. "Bankruptcies and aggregate economic fluctuations," Research Discussion Papers 25/1992, Bank of Finland.
    6. Svensson, Lars E. O., 1991. "The term structure of interest rate differentials in a target zone : Theory and Swedish data," Journal of Monetary Economics, Elsevier, vol. 28(1), pages 87-116, August.
    7. Giuseppe Bertola & Lars E. O. Svensson, 1993. "Stochastic Devaluation Risk and the Empirical Fit of Target-Zone Models," Review of Economic Studies, Oxford University Press, vol. 60(3), pages 689-712.
    8. Suvanto, Antti, 1992. "Pricing decisions and the position constraint in foreign exchange dealing," Research Discussion Papers 27/1992, Bank of Finland.
    9. Mr. Lars E. O. Svensson, 1991. "Assessing Target Zone Credibility: Mean Reversion and Devaluation Expectations in the EMS," IMF Working Papers 1991/096, International Monetary Fund.
    10. Rose, Andrew K & Svensson, Lars E O, 1991. "Expected and Predicted Realignments: The FF/DM Exchange Rate During the EMS," CEPR Discussion Papers 552, C.E.P.R. Discussion Papers.
    11. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    12. Frankel, Jeffrey & Phillips, Steven, 1992. "The European Monetary System: Credible at Last?," Oxford Economic Papers, Oxford University Press, vol. 44(4), pages 791-816, October.
    13. Bingham, T.R.G., 1992. "The Ecu and reserve management," Research Discussion Papers 17/1992, Bank of Finland.
    14. Froot, Kenneth A & Obstfeld, Maurice, 1991. "Stochastic Process Switching: Some Simple Solutions," Econometrica, Econometric Society, vol. 59(1), pages 241-250, January.
    15. Lindberg, H. & Soderlind, P., 1991. "Testing the Basic Target Zone Model on Swedish Data," Papers 488, Stockholm - International Economic Studies.
    16. Lehto-Sinisalo, Päivikki, 1992. "The History of Exchange Control in Finland," Research Discussion Papers 3/1992, Bank of Finland.
    17. Paul R. Krugman, 1991. "Target Zones and Exchange Rate Dynamics," The Quarterly Journal of Economics, Oxford University Press, vol. 106(3), pages 669-682.
    18. Autio, Jaakko, 1992. "Lama ja raha : Suomen luopuminen kultakannasta vuonna 1931," Research Discussion Papers 30/1992, Bank of Finland.
    19. Svensson, Lars E. O., 1993. "Assessing target zone credibility : Mean reversion and devaluation expectations in the ERM, 1979-1992," European Economic Review, Elsevier, vol. 37(4), pages 763-793, May.
    20. Weber, Axel A, 1992. "Time Varying Devaluation Risk, Interest Rate Differentials and Exchange Rates in Target Zones: Empirical Evidence from the EMS," CEPR Discussion Papers 611, C.E.P.R. Discussion Papers.
    21. Kovanen, Arto, 1992. "International capital flows in Finland 1975-1990: The role of expectations," Research Discussion Papers 5/1992, Bank of Finland.
    22. Kokkola, Tom, 1992. "An international bibliography of payment instruments and systems literature for the years 1985-1991," Research Discussion Papers 14/1992, Bank of Finland.
    23. Koskela, Erkki & Viren, Matti, 1992. " Inflation, Capital Markets and Household Saving in the Nordic Countries," Scandinavian Journal of Economics, Wiley Blackwell, vol. 94(2), pages 215-227.
    24. Christiansen, Bent & Gudmundsson, Már & Lehmussaari, Olli-Pekka & Lindenius, Christina & Simonsen, Sigurd & Starck, Christian & Åkerholm, Johnny, 1992. "Pohjoismaiden keskuspankit tulevassa Euroopassa," Research Discussion Papers 24/1992, Bank of Finland.
    25. Peisa, Paavo & Takala, Kari, 1992. "Selviämmekö lamasta ehjin nahoin? : Bruttokansantuotteen rakennemallien estimointituloksia," Research Discussion Papers 15/1992, Bank of Finland.
    26. Mr. Daniel Gros, 1990. "Stabilization Policy with Bands," IMF Working Papers 1990/049, International Monetary Fund.
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    Cited by:

    1. Vajanne, Laura, . "The Exchange Rate Under Target Zones," ETLA A, The Research Institute of the Finnish Economy, number 16, December.

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