Browsing by Subject "ERM"

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  • Hämäläinen, Heikki T.; Vehmas, Maritta (1996)
    Bank of Finland. Bulletin 70 ; 8 ; August
  • Mattila, Veli-Matti (1997)
  • Ranki, Sinimaaria (1998)
    Bank of Finland studies. E 9
    Abstract This study, "Exchange Rates in European Monetary Integration", is an empirical contribution to exchange rate theory and international monetary cooperation.The first essay, "Realignment expectations in the ERM: 1987-1992", studies the five-year period of convergence and stability in the European Monetary System (EMS).Existing literature on target zones is utilized to model and estimate devaluation expectations.The results suggest that the exchange rates gained credibility towards the end of this five-year period. German Monetary Unification (GMU) initially had positive spill-over effects on partner countries.Later these effects reversed and the system became increasingly burdened by the consequences of high German interest rates. The second essay, "Monetary policy in the ERM: Internal targets or external constraints?", focuses on the role of the membership in the Exchange Rate Mechanism (ERM) as a determinant of monetary policy.We derive a monetary policy rule that trades off costs of interest rate instability against benefits from successful demand management and stable exchange rate in the ERM.The model is then used to interpret the empirical evidence from a VAR estimated on data from the member countries.The three main observations emphasized are the relatively stable role of the domestic variables, the declining importance of the foreign variables and the growing importance of domestic interest rate history as a determinant of monetary policy decisions. The content of the third essay, "On monetary policy in a bipolar international monetary system", focuses on the possible difficulties in reconciling a domestic inflation target with exchange rate stabilization when the currency is an international key currency.We analyse the international transmission of shocks, and the role of the exchange rate therein, within the framework of a model of two large symmetric open economies.The model's implications are then discussed in the context of the empirical evidence from a VAR estimated on data from Germany and the US.From the model's perspective, the inflation rate seems to be driven by domestic supply shocks in both countries.If the initial source of the disturbance is a US supply shock, Europe can stabilize the exchange rate only at the cost of domestic price stability. Alternatively, Europe has to let the exchange vary to sustain domestic price stability. Keywords: ERM, exchange rates, devaluation expectations, reaction function, monetary policy, international spillovers
  • Korhonen, Tapio (2001)
    Suomen Pankin keskustelualoitteita 25/2001
    This paper presents the salient aspects of Finland's monetary and exchange rate policies during the run-up to monetary union in the 1990s.In the course of slightly more than a decade, Finland's monetary and exchange rate policies were thoroughly revamped.The remnants of heavy regulation were removed and a market-based financial system was put in place.There were serious problems associated with the liberalisation process in the early part of the decade, the most noteworthy being an economic and banking crisis. Finland's financial system nonetheless developed rapidly and became a more integrated part of the global system.As regards exchange rate policy, almost all varieties of exchange rate regime were tried.A fixed rate regime based on a currency index fell apart in the early part of the decade and was replaced by a floating rate system.Later, in 1993, this was combined with an inflation-targeting monetary policy strategy.At the start of 1995 Finland joined the European Union, and in October 1996 the markka was joined to the EU's Exchange Rate Mechanism.The improvement in financial and price stability that followed the economic crisis facilitated the adjustment to the euro area's single currency and single monetary policy at the start of 1999, which was accomplished without serious problems.Key words: monetary policy, foreign exchange policy, EMU, euro, monetary policy arrangements
  • (1997)
    Bank of Finland. Bulletin 71 ; 12 ; December
  • (1997)
    Bank of Finland. Bulletin 71 ; 6-7 ; June-July
  • (1996)
    Bank of Finland. Bulletin 70 ; 12 ; December
  • Ranki, Sinimaaria (1997)
    Suomen Pankin keskustelualoitteita 5/1997
    This study is concerned with the determinants of monetary policy in the ERM countries.We derive a monetary policy rule, an interest rate rule, from a minimization problem faced by the central bank. The loss fuction trades off costs of interest rate instability against benefits from successful demand management and stable exchange rate in the ERM.ERM-related considerations, particularly exogenous effects from German interest rates as well as deviations from the ERM central rates, are introduced into the analysis through the latter channel.In the empirical section of the paper, we seek to quantify the significance of the effects of the various factors on the domestic interest rate of the ERM-countries by performing regression analysis with the domestic short-term interest rate as the dependent variable.The evidence suggests that the countries can be divided into two groups.In the first group (Belgium, Denmark, France and the Netherlands) the exchange rate has deviated more from the central rate since the widening of the fluctuation bands than it did earlier.At the same time, the direct influence of German monetary policy has diminished, while the significance of the lags of the domestic interest rate has remained high or even increased.In the second group (Great Britain, Italy and Spain) the trade-off in monetary policy has been more a consideration of the two domestic factors than domestic and foreign components of the loss function.These results seem to be consistent with the interpretation that the EMS has become more symmetric, especially as regards the "core" countries.One could also interpret the development of the role of the EMS as a gradual introduction of an implicit coordination mechanism through which countries have sought to improve interest rate convergence by coordinating their policy targets.In this way, the role of the ERM as a constraint on achieving policy targets has decreased. Keywords: ERM, reaction function, exchange rates, monetary policy
  • Henriksson, Marketta (2005)
    Bank of Finland Research Discussion Papers 7/2005
    Differences in growth, productivity and inflation levels are going to be a prominent feature of the future of EMU, as the convergence process is still on-going in the new Member States. This convergence process can be described by the Balassa-Samuelson proposition, which states that faster growth in the traded goods sector than in the non-traded goods sector results in a rise in the price of non-traded goods and an appreciation of the trend real exchange rate. In this study, the aim is to construct a small open economy model that enables examination of the effects of Balassa-Samuelson-type growth in an intertemporal fixed exchange rate framework with a focus on the external balance. To address the well-known problems with small open economy models, an endogenous discount rate is used. The results imply that faster productivity growth in the traded than in the non-traded goods sector may induce external imbalances, leading to increased vulnerability of the economy. However, trade account deficits would appear to be a temporary phenomenon, as this line of development can be reversed by the natural shift in the composition of consumption towards non-traded goods that is characteristic of catch-up economies. In the meantime, fiscal policy plays a key role. Key words: small open economy, Balassa-Samuelson effect, ERM II, external balance JEL classification numbers: F41, F33, F32
  • Vanhala, Matti (1996)
  • Ranki, Sinimaaria (1996)
    Bank of Finland studies. E 4
    The purpose of this study is to analyze realignment expectations in the exchange rate mechanism of the European Monetary System (EMS), in particular with reference to the five year period (1987-1992) during which no realignments were done.The period chosen for this study provides us an interesting sample in this respect, because, in mid-1990, the EMS faced a historical asymmetric shock of German Monetary Unification (GMU).Dramatic changes in the fundamentals of the anchor country of the system can help us to detect channels through which macroeconomic developments affect the pressure to realign and, therefore, expectations of such realignments. By using a model that breaks the interest rate differential in two components, the expected rate of depreciation within the allowed fluctuation band and the expected rate of depreciation of the central parity rate, we get a measure for the credibility of the exchange rate.We estimate the expected rate of depreciation of the exchange rate within the band, subtract the results from the interest rate differential and obtain values for the expected rate of devaluation.Finally, the estimated values for the expected rate of devaluation are regressed on selected macroeconomic variables in order to find out to which extent the expected rate of devaluation depends on economic fundamentals.The model was built by including the commonly most important factors for exchange rate determination. We observed increased exchange rate credibility in the form of decreasing devaluation expectations over the period 1987-1992.The explanation for this increase in the stability of the EMS is that German interest rates and inflation, were moving upwards and hence, approaching the corresponding variables of the other EMS countries. It was the convergence of these variables that eased the pressure on the nominal exchange rates.Therefore, signs of the 1992 crisis could not be seen in advance in expectations. Our results emphasize the role of the relative cyclical positions of the pegging countries vis-à-vis the anchor country of the system.Thus, expectations of possible realignments as a means of adjustment became actual first after it could be seen that there was a discrepancy between the cyclical needs of the economies in the other EMS countries and the high interest rates imposed on the ERM by Germany.These discrepancies became visible first in the traditional weak-currency countries that faced the most difficult domestic economic situation.This is mirrored by the fact that for these countries the government deficit, relative to Germany, clearly affected devaluation expectations.The divergence of the business cycles added to this effect.The level of foreign exchange reserves of the central bank was observed by the markets, which indicates the praneness of these currencies to get under a speculative attack.In the hard-currency countries, by contrast, devaluation expectations could not be seen even in the very eve of the crisis.For these countries, we obtained the inverse result that a growing government domestic deficit as compared to Germany tends to strengthen the currency of the home country.Markets also seem to observe the inflation rate differential.For the crisis, however, this factor could not play a crucial role because the inflation rates of the hard-currency countries were practically at the German inflation rate level.All in all, the results of this study suggest that the crisis was due to the reversal in the German business cycle in a situation where the anchor country conducted a strict monetary policy to fight domestic inflation pressures. Keywords: Exchange Rate Mechanism, target zone, devaluation expectations, exchange rates, German Monetary Unification
  • Korhonen, Tapio (2001)
    Suomen Pankin kansantalousosaston työpapereita 3/2001
    Selvityksessä käydään läpi pääpiirteittäin Suomen raha- ja valuuttapolitiikka 1990-luvulla rahaliittoon valmistauduttaessa. Runsaassa kymmenessä vuodessa Suomen raha- ja valuuttamarkkinat muuttuivat merkittävästi.Säännöstelyn jäänteet poistettiin ja Suomeen luotiin markkinapohjainen rahoitusjärjestelmä. Liberalisointiin liittyi vuosikymmenen alussa suuria vaikeuksia, erityisesti vakava talous- ja pankkikriisi.Samalla Suomen rahoitusjärjestelmä kuitenkin kehittyi voimakkaasti ja kansainvälistyi.Valuuttapolitiikassa sovellettiin lähes kaikkia valuuttakurssijärjestelmiä.Valuuttakoriin perustunut markan kiinteä kurssi murtui vuosikymmenen alussa, ja vuonna 1993 kelluvan kurssin oloissa omaksuttiin inflaatiotavoitteeseen perustuva rahapolitiikan strategia.Vuoden 1995 alusta Suomi liittyi Euroopan unioniin, ja lokakuussa 1996 markka kiinnitettiin EU:n valuuttakurssimekanismiin ERMiin.Talouskriisiä seurannut rahoitus- ja hintatasapainon paraneminen myötävaikutti siihen, että sopeutuminen euroalueen yhteiseen rahaan ja rahapolitiikkaan vuoden 1999 alusta sujui ilman merkittäviä ongelmia. Asiasanat: rahapolitiikka, valuuttapolitiikka, EMU, euro, rahapolitiikan välineet
  • Lahdenperä, Harri; Pyyhtiä, Ilmo (2005)
    Valuuttakurssimekanismi ERM II tarjoaa euroalueeseen kuulumattomille EU:n jäsenmaille mahdollisuuden kytkeä rahansa euroon.ERM II -jäsenyys on osa lähentymistä, jonka lopullisena päämääränä on liittyminen talous- ja rahaliiton kolmanteen vaiheeseen ja kansallisen rahan korvaaminen yhteisellä rahalla, eurolla.