Monetary Policy in Finland

Foreword 5

1 The Bank of Finland's functions 9

2 The Bank of Finland's role in financial markets 11
2.1 The Bank's balance sheet 11
2.2 Money supply and demand, and monetary aggregates 14

3 Financial markets 20
3.1 Changes in financial markets 20
3.1.1 Financial markets become internationalized and controIs on capital movements are lifted 20
3.1.2 Emergence of market interest rates and interest rate deregulation 22
3.1.3 Formation of the money market 26
3.1.4 Evoluclon of the capital markets 27
3.1.5 Changes in how financial institutions operate 31
3.2 Reform of the central bank financing system 34

4 Objectives and implementation of monetary policy 41
4.1 The ultimate target - why aim at low inflation? 44
4.2 Ultimate, intermediate and immediate targets' in fixed and floating exchange rate regimes 47
4.3 The institutional framework for monetary policy 58
4.3.1 The exch~ge rate system 58
4.3.2 The liquidity facility and banks' central bank financing 64
4.3.3 The rrrinimum reserve system 68
4.3.4 The base rate 71
4.4 Domestic money market operations and interventions in the foreign exchange market 74
4.4.1 Domestic money market operations 74
4.4.2 Interventions in the foreign exchange market 78
4.5 How monetary policy decisions are made 84
4.6 Bank of Finland information policy 87

5 Monetary integration in Europe and the Bank of Finland 91

Appendix
Financial relations between the banks and the Bank of Finland 96