Exchange rate policy and imported inflation in a credit rationing economy

The paper assesses the effects of exchange rate policies and imported inflation in the case of Finland, which is a small open economy with underdeveloped financial markets. Under such circumstances interest rates do not necessarily equilibrate the credit market, so that a simplified theoretical disequilibrium model with credit rationing is first presented. In the second part of the paper the Bank of Finland quarterly econometric model for the Finnish economy is simulated. The most important conclusion to emerge from the simulations with the quarterly model is that the effects are highly dependent on the credit market conditions.