Trade with the West and Russia - A Long-term Perspective on Finnish Economic Growth, Fluctuations and Policies

The paper considers growth and fluctuations in the Finnish economy in the post-war period starting from her long-run dual strategy vis-à-vis export markets in Western Europe and Russia. Finland has wanted to utilise the more rapid growth based on deeper integration in the former, but has simultaneously wanted to reap the gains linked to her proximity to the latter. We build a theoretical open economy model based on export supply and demand and then for the whole economy and analyse the role of economic policies, notably exchange rate policies in this connection. Empirically, we estimate the relationships using the SVAR methodology identifying the relevant demand and supply shocks and shocks in policy responses. The results clearly show that shifts in competitiveness have played a key role in boosting both categories of exports. However, firms have been able to shift on their own in exports from the Russian market to the West when needed. Productivity gains have been linked to Western exports, but not to exports to Russia. From a macroeconomic point of view exchange rate policies have been roughly as important as fiscal policies to explain economic fluctuations, although the conclusion on this quite sensitively depends on the SVAR model used. However, economic policies have been less important than the aggregate demand and supply shocks.