Central bank policy and domestic stability in a small open economy

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Title: Central bank policy and domestic stability in a small open economy
Author: Halttunen, Hannu ; Korkman, Sixten
Organization: Bank of Finland
Series: Bank of Finland. Series D
Series number: 47
Year of publication: 1981
Publication date: 1.1.1981
Pages: 91
Subject (yso): keskuspankit; avoin talousjärjestelmä; inflaatio; työllisyys; valuuttakurssit; rahapolitiikka; valuuttapolitiikka; suhdannevaihtelut
Keywords: Suomi
Abstract: There is an extensive theoretical literature dealing with the role of economic policy in small and open economies. The models employed in this literature often seem to yield simple and strong conclusions: under fixed exchange rates and in the long run monetary and fiscal policy will be unable to affect the level of output and emplöyment, a change in the exchange rate similarly has effects only on the price level and other nominal magnitudes etc. The relevance of· these conclusions is generally admitted to be confined to the "long run". From the point of view of macroeconomic management, however, the essential question is not whether economic policies have effects in the long run, but rather whether they have "sufficiently fast" and "sufficiently enduring" effects (so that they affect demand and output during this year and next). This is clearly an empirical question. Seldom, however, are the models used to derive far-reaching policy conclusions confronted in anyway with empirical data. The aim of this study is to consider the significance of central bank policy (by which we mean monetary and exchange rate policy) for the cyclical behaviour of an economy with particular reference to Finland. The structure of the study is as follows. In Section 2 we specify a model of an open economy which is simple and yet includes variables reflecting the operation of exchange rate and monetary policy. The model forms the basis for a discussion of the characteristics of long-run equilibrium as well as of the significance of the monetary and exhange rate policy pursued for the short-run effects of various exogenous disturbances. At the end of Section 2, we also make some observations on the consequences of policy for the dynamics of adjustment. In Section 3 a partially condensed version of the model is estimated and used for simulation experiments that illustrate the quantitative significance of policy issues discussed in Section 2. Section 4 concludes.
Rights: https://helda.helsinki.fi/bof/copyright

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