Monetary Policy and Inflation Indicators for Finland

Abstract:     
This paper is assessing various leading indicators of inflation in Finland and their practical role in a framework for Finnish monetary policy under a floating exchange rate. Following Friedman (1990) who argued for the explicit inclusion of a broad set of economic indicators in the monetary decision process, absent a practical intermediate target, this paper tests a large number of indicators for their relevance in determining future inflationary pressure and guiding monetary policy. The robustness of the indicators is examined under different models, guided by alternative views of the monetary transmission process. The results indicate that a monetary conditions index, stumpage prices, and real and nominal effective exchange rates are among the strongest indicators, affecting inflation with a lag of between 4 and 11 quarters.

Number of Pages in PDF File: 44

JEL Classification: C113, O11, O55

working papers series