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Fundamental equilibrium exchange rate: a case study of the Finnish Markka

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  • Hoej, Liselotte

Abstract

The purpose of this paper is to estimate the Fundamental Equilibrium Exchange Rate (FEER) for the Finnish economy and to derive a relationship between the current account and the real exchange rate in the macroeconomic equilibrium.FEER is defined as the real exchange rate which delivers a sustainable current account balance when the economy is growing at its equilibrium (non-inflationary) rate.The results emphasize the effects of the collapse of the Finnish-Soviet trade in 1991 on both the equilibrium rate of output and the equilibrium exchange rate.The assessment of the exchange rate situation prevailing in late 1994 points to the conclusion that there may be emerging conflicts in Finland between the targets of external and internal balance, unless structural reforms or the recovery of the international economy move the fundamentals from their present position.

Suggested Citation

  • Hoej, Liselotte, 1995. "Fundamental equilibrium exchange rate: a case study of the Finnish Markka," Bank of Finland Research Discussion Papers 2/1995, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp1995_002
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    1. Church, Keith B, 1992. "Properties of the Fundamental Equilibrium Exchange Rate in Models of the UK Economy," National Institute Economic Review, National Institute of Economic and Social Research, vol. 141, pages 62-70, August.
    2. Alogoskoufis, George, 1989. "On Fiscal Policies, External Imbalances and Fundamental Equilibrium Exchange Rates," CEPR Discussion Papers 322, C.E.P.R. Discussion Papers.
    3. Houthakker, Hendrik S & Magee, Stephen P, 1969. "Income and Price Elasticities in World Trade," The Review of Economics and Statistics, MIT Press, vol. 51(2), pages 111-125, May.
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