SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND

Monetary Policy in the Environment of

Recovery: Experiences of Baltic Sea Region

Märten Ross

Suomen Pankki

Warsaw, May 24th 2012

Märten Ross

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND

Baltic Sea – monetary policy laboratory?

Free floaters: Sweden, Poland

Managed floater: Russia

Fixers: Denmark, Lithuania and Latvia

Euro: Finland, Germany and Estonia

Märten Ross 2

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND

Recovery was fairly strong in 2010-2011

3

-5

-4

-3

-2

-1

0

1

2

3

4

5

2007 2008 2009 2010 2011 2012

Euro area USA Japan China*

Percentage change from previous quarter

*Estimate by BOFIT.

Sources: ECB, BEA and ESRI.

Märten Ross

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND

Inflation pressures built up

Märten Ross 4

-4

-2

0

2

4

6

8

10

2007 2008 2009 2010 2011 2012

Euro area USA Japan China

Percentage change from previous year

Sources: ECB and Bloomberg.

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND

Eurosystem monetary policy has targeted its

primary goal

Märten Ross 5

0

1

2

3

4

5

6

7

2000 2005 2010

ECB Fed BoJ BoE Riksbank

%

Source: Bloomberg.

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND

Debt crisis complicates the picture

Märten Ross 6

0

5

10

15

20

25

30

35

40

2008 2009 2010 2011 2012

Germany Finland France Greece

Ireland Italy Portugal Spain

%, 10 y

Source: Bloomberg.

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND

Problems in transmission mechanism were

targeted via unconventional monetary policy

Märten Ross 7

-1 500

-1 000

-500

0

500

1 000

1 500

2009 2010 2011 2012

Supplementary longer-term refinancing operations (36 mth)

Fine-tuning operations (1-7 days)

Net recourse to the standing facilities (overnight)Main refinancing operations (1 week)

Supplementary longer-term refinancing operations (1-12 mth)

Longer-term refinancing operations (3 mth)

EUR bn

Source: Bank of Finland.

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND

Monetary policy in Euro area

Euroarea monetary policy has a clear mandate: price

stability for the whole euro area

– Despite challenging environment of the debt crisis monetary

policy credibility has remained strong and inflation expectations

stable

– Country specific shocks and diverging policies can affect short-

term developments, but diversity per se is not a problem

– ’Optimality’ of common monetary policy in the long run depends

very much on the member states themselves as wrong policies

by them can evolve into big structural problems.

Märten Ross 8

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND

In any bigger currency area one faces some

level of divergence

Märten Ross 9

-2

-1

0

1

2

3

4

5

6

2007 2008 2009 2010 2011 2012

Spain Italy France Germany

Percentage change from previous year

Source: Eurostat.

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND

Price stability achieved also in Finland

Märten Ross 10

-1

0

1

2

3

4

5

2007 2008 2009 2010 2011 2012

Euro area Finland

%, HICP

Sources: European Central Bank and Statistics Finland.

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND

Data on inflation expectations support the

perception of price stability being achieved

Märten Ross 11

-4

-3

-2

-1

0

1

2

3

4

2007 2008 2009 2010 2011 2012

Euro area USA

%, 2Y inflation swaps

Source: Reuters.

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND

Thank you!

Märten Ross 12