IDEAS home Printed from https://ideas.repec.org/p/bof/bofrdp/1992_037.html
   My bibliography  Save this paper

The currency band and credibility : The Finnish experience

Author

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

Abstract

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.

Suggested Citation

  • 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
    as

    Download full text from publisher

    File URL: https://helda.helsinki.fi/bof/bitstream/123456789/15734/1/Suomen_pankin_keskustelualoitteita_37_92.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

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

    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. Bärlund, Ragni, 1992. "Finland's balance of payments, 1890-1913," Research Discussion Papers 42/1992, Bank of Finland.
    2. Tyrväinen, Timo, 1992. "Wage drift and error correction: Evidence from Finland," Research Discussion Papers 35/1992, Bank of Finland.
    3. Antoine Magnier, 1992. "Théorie des zones cibles et fonctionnement du SME," Économie et Prévision, Programme National Persée, vol. 104(3), pages 87-113.
    4. Starck, Christian & Virén, Matti, 1992. "Bankruptcies and aggregate economic fluctuations," Research Discussion Papers 25/1992, Bank of Finland.
    5. Galindo, Arturo J., 2000. "Estimating credibility in Colombia's exchange-rate target zone," Journal of Development Economics, Elsevier, vol. 63(2), pages 473-484, December.
    6. Jean-Pierre Laffargue & Sanvi Avouyi-Dovi, 1992. "Anticipations stabilisatrices dans un système de serpent monétaire. Théorie et application au système monétaire européen," Revue Économique, Programme National Persée, vol. 43(6), pages 1107-1128.
    7. Tyrväinen, Timo, 1992. "Wage setting, taxes and demand for labour : Multivariate analysis of the cointegration relations," Research Discussion Papers 22/1992, Bank of Finland.
    8. Darvas, Zsolt, 1999. "Az árfolyamsávok empirikus modelljei és a devizaárfolyam sávon belüli előrejelezhetetlensége [Empirical models of exchange rate target zones]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(6), pages 507-529.
    9. Jeff Frankel, Steve Phillips, and Menzie Chinn., 1992. "Financial and Currency Integration in the European Monetary System: The Statistical Record," Center for International and Development Economics Research (CIDER) Working Papers C92-005, University of California at Berkeley.
    10. Araújo, Aloísio Pessoa de & Feijó Filho, Cypriano Lopes, 1994. "Bandas de cambio : teoria, evidencia empirica e sua possivel aplicação no Brasil," FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) 234, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).
    11. Bingham, T.R.G., 1992. "The Ecu and reserve management," Research Discussion Papers 17/1992, Bank of Finland.
    12. António Portugal Duarte & João Sousa Andrade & Adelaide Duarte, 2013. "Exchange Rate Target Zones: A Survey Of The Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 27(2), pages 247-268, April.
    13. Hans Lindberg & Lars E.O. Svensson & Paul Soderlind, 1991. "Devaluation Expectations: The Swedish Krona 1982-1991," NBER Working Papers 3918, National Bureau of Economic Research, Inc.
    14. Dumas, Bernard & Peter Jennergren, L. & Naslund, Bertil, 1995. "Realignment risk and currency option pricing in target zones," European Economic Review, Elsevier, vol. 39(8), pages 1523-1544, October.
    15. Tyrväinen, Timo, 1992. "Tax incidence in union models," Research Discussion Papers 23/1992, Bank of Finland.
    16. Golan, Amos & Kim, Moshe, 1992. "Maximum entropy and the existence of consistent aggregates : An application to U.S. banking," Research Discussion Papers 26/1992, Bank of Finland.
    17. Stefano Cavaglia & Kees Koedijk & Peter Vlaar, 1994. "Exchange rate expectations and risk premia in the European Monetary System: 1985–1991," Open Economies Review, Springer, vol. 5(4), pages 347-360, October.
    18. Jorgensen, Bjorn N. & Mikkelsen, Hans Ole ae, 1996. "An arbitrage free trilateral target zone model," Journal of International Money and Finance, Elsevier, vol. 15(1), pages 117-134, February.
    19. Jess Rodr?uez L?ez & Hugo Rodr?uez Mendiz?al, 2002. "On the Choice of an Exchange Rate Regime: Target Zones Revisited," UFAE and IAE Working Papers 518.02, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    20. Tarkka, Juha, 1992. "Tax on interest and the pricing of personal demand deposits," Research Discussion Papers 11/1992, Bank of Finland.

    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:bof:bofrdp:1992_037. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/bofgvfi.html .

    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: Minna Nyman (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 hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.