Bank of Finland and Finland s economic internationalization. Turku

Transcription

1 Bank of Finland and Finland s economic internationalization Antti Kuusterä Juha Tarkka Turku

2 Early history - towards independent exchange rate policy Monetary reform silver standard stabilized the currency - tightly connected with the Russian monetary system First steps towards independent exchange rate policy - Bank of Finland got right to discount bills of exchange and to deal in foreign bills the network of Bank s foreign correspondents emerged - the start of quotations for currency exchange rates

3 The first foreign correspondents The founding phase St. Petersburg (Gustaf Sterky & Son) - Hamburg (Salomon Heine) - Stockholm (Tottie & Arfwedson) - Riga (Westberg & Co ) The enlargement phase during 1860s - 8 new correspondents (Western Europe) - Own office in St. Petersburg from 1859

4 Monetary reform in Finland and parting of the ways Crimean war and the fall of the silver standard in Russia Bank of Finland had no choice but follow Russian plans to restore the convertibility of the rouble failed Finland succeeded Return to silver standard was very hard process in Finland Strict monetary policy in order to retain the silver parity of markka After the reform, senator Snellman continued strict monetary policy to protect silver reserves under difficult conditions Benefits in the long run versus losses in the short run

5 Change to the gold standard 1878 Bank of Finland in a global exchange rate system Very stable exchange rates up to 1914 Russia joins 1897 The network of foreign correspondents covers Europe and North-America Division of labour between Bank of Finland and private commercial banks

6 Lessons of the 19th century The importance of stable currency system - economic development and the monetary reform of 1840 The importance of silver and gold standards - the credibility of Finland increased - free from the unstable Russian monetary system Bank of Finland and the bills of exchange markets - made easier for Finnish export firms to integrate into international markets Period economic growth accelerates and the Finnish wood industry strengthens its position in the Western European markets

7 The role of the Bank in the first decades of independent Finland Strategic targets - Export led growth Operational targets - Stable currency - International competitinevess by undervalued markka - Actions to restore the credibility of Finland in order to access international capital markets

8 Continuity after the war Finland affiliated to IMF and to Bretton Woods system Parlament ratified the pact 1948 Fixed exchange rate system Theory versus practice Markka par value was fixed 1951 After devaluation in 1949 Free convertibility 1959 Simultaneous with West European currencies

9 The new role of the Bank of Finland Bank of Finland and the regulation of foreign capital - no foreign loans without the Bank s permission - deciding authority in all big investments Active actor in promoting export - guarantees for export - delivery loans for export Bilateral trade and payment agreements between Soviet Union and Finland - clearing centre in Finland - financer of trade imbalances - risk bearer in Finland

10 International Integration and Monetary Policy Financial openness important for monetary policy Theoretical policy options: Balance of Payments orientation (Currency principle) With limited capital mobility, stabilizes the current account With mobile capital, monetary autonomy disappears Sterilization of currency flows (short term option) Floating (internal objectives, but exch. rate volatility) In Finland, the Balance of Payments dominated monetary policy already in Weakness of the rouble, and silver reform of the markka International Overend crisis 1866, famine of 1867

11 Under the Gold Standard Finland on gold from 1878 until 1914 Finland had a large trade deficit Financed by long term capital imports (by the state) Monetary policy conditions dependent on the success in raising of foreign capital International crises and relations with the Empire Periods of tightness in 1878, , 1900, Monetary policy correlations with abroad: Weak until about 1895, except with Sweden Significant after 1895, except with Russia

12 Interwar Problems Stabilization of markka to the dollar, then gold following Britain (1925); but very high interest rates Governor Ryti: fixed exchange rate best for a capital importing country Attract capital, get a lower interest rate Ended with overheating and credit crunch in 1928 Balance of Payments dominated policy until 1933 After the crisis, big current account surpluses Passive monetary policy with peg to pound sterling Debt repayment policy

13 Bretton Woods and after Finland joined the IMF in 1948 Import restrictions mostly lifted in 1958 Chronic tendency to deficits emerges The B.o.P. constraint tightens money in the 1960 s Attempted solution by the large devaluation of 1967 Overheating leads to IMF crisis of B.o.P oriented tight policy until 1978 Nordic interdependence emerges Swedish devaluations of 1977, 1982 and Norwegian devaluations of 1978, 1986 affect Finland

14 Deregulation and crisis 1980 s mark the opening of the Finnish financial markets capital movemements deregulated High interest rates and inflation Decoupling of currency flows from the current account Deteriorating current account and a credit boom Crisis in 1991, after collapse of Soviet trade High interest rates already from late 1989 Credit market tight already in 1990 B.o.P deminated policy until 1993 Interest rates brought down to German levels in 1993 Big current account surplus from 1995 on

15 EMU Membership Finland s monetary condtions converged with European Core countries by late 1996 Inflation below 2% in 1994 ERM entry in October 1996 After 1999, complete intergation of monetary policy For Finland, a decade of relative stability followed why? Some explanations (possibly complementary): Monetary conditions had already converged before integration - no entry shock to interest rates Capital markets integration channeled savings abroad, producing a C/A surplus Contribution from fiscal policy?

16 A Concluding Remark Monetary integration means capital mobility and a fixed exchange rate (or monetary union) There are several good reasons to fix the exchange rate, esp. for small economies The best selling point is dangerous, however: If you suffer from higer interest rates than other countries, Do not do it in order to get interest rates down! Convergence first, integration second! Finnish experience of 1920 s and mid-1980 s