Rational exchange rate and price expectations under different exchange rate regimes in Finland

Abstract

In this paper a small aggregative model of the Finnish economy with rational exchange rate and price expectations is specified and estimated with quarterly data. Optimal exchange rate regimes are assessed by simulating effects of various unanticipated and permanent shocks. According to the simulation results fixed exchange rates seem to insulate the domestic economy from monetary shocks while floating rates are preferable if shocks are real.