Monetary Policy in Finland: The Last Ten Years

Abstract

Monetary Policy in Finland: The Last Ten Years

During the past ten years Finland has attempted to break away from the spiral of devaluation and inflation which has plagued the Finnish economy throughout the post-war period. The overall policy strategy has been rested on three main pillars: (1) a large devaluation at the beginning of the period coupled with a comprehensive stabilization programme and growth-promoting measures to restore competitiveness and to promote further diversification of the economy, (2) the development and use of active counter-cyclical policy weapons to reduce fluctuations in demand and (3) the use of monetary and exchange rate policy to break the expectational basis of the inflationdevaluation spiral. After sketching the economic and institutional setting in which economic policy is conducted, the implementation of this strategy in three subperiods is reviewed. The first sub-period, runinng from 1967 to 1971, was characterized by devaluation and stabilization. The second, extending from 1972 to 1974, was a time of strong expansion. The third sub-period, running from 1975 to 1977, saw the adoption of a restrictive policy in order to check the growth of foreign debt and to dampen inflation. An attempt is made to draw lessons from the experience of the past decade. The difficulty of pursuing an active counter-cyclical policy and the importance of achieving structural stability are stressed. The problems created by the rigidity of relative prices, relative incomes and relative wages are also considered as is the importance of expectations.