Research Discussion Papers, Bank of Finland
Dynamic Effects of Demand and Supply Disturbances on the Finnish Economy: Did Liberalization of Capital Movements Matter?
Abstract: The purpose of this study is to analyze the dynamic
effects of demand and supply disturbances on the Finnish economy. In
addition, the study aims at finding out whether liberalization of capital
movements affected the transmission of disturbances. The analysis is based
on a vector autoregressive model for unemployment and the GNP from 1970.1
to 1990.4. The vector autoregressive representation is then transformed to
a corresponding moving average representation and the dynamic effects of
disturbances are analyzed by impulse response functions. The model
restricts the number of disturbances to two, called demand and supply
disturbances. Estimation shows that demand disturbances have temporary
effects on GNP and unemployment, the effects of supply disturbances on GNP
are permanent but their effects on unemployment are temporary. As capital
mobility increases the effects of demand disturbances die out faster. There
is no significant difference in the short term effects of supply
disturbances on GNP but the long term effects are magnified. This is in
accordance with economic theory.
Keywords: demand and supply; capital movements; Finnish economy; (follow links to similar papers)
39 pages, December 22, 1995
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