RMIT UNIVERSITY VIETNAM

2019

Course code ECON1192

Course name Macroeconomics 1
Campus Saigon South Campus
Semester 1/2020
Assignment Monetary Policy Report - Finland
Lecturer Dr. Binh Nguyen Thanh
Student Huynh Nhat Dang

Number of ID s3817974

Email s3817974@rmit.edu.vn
Class group SGS – Group 05
Word count
1547 words

TABLE OF CONTENTS
Acronyms & Abbreviations 3

Macroeconomic Snapshot 4

Monetary-Policy Analysis 6

Impact Evaluation 6

Policy Comparison: Vietnam-Finland 8

PPP Test 9

Reflection 9

References 11

Appendix 16
 Acronyms & Abbreviations
AD - Aggregate Demand
APP – Asset Purchase Program
(Finland’s Primary Monetary Policy)
BOF – Bank of Finland ( Finland’s Central Bank)
CIA – Central Intelligence Agency
ECB – European Central Bank
EUR – Euro (currency)
EUVTA- Europe-Vietnam Trade Agreement
FDI – Foreign Direct Investment
FTA – Free Trade Agreement.
GDP – Gross Domestic Product
IMF – International Monetary Fund
LRAS - Long Run Aggregate Supply
MM – Money Market
MD - Money Demand
MP - Monetary Policy
MPR - Monetary Policy Rate
MRO – Main Refinancing Operations
MS - Money Supply
NER – Nominal Exchange Rate
OMOs – Open Market Operations
PEPP – Pandemic Emergency Purchase Programme
(Finland’s Monetary Policy In COVID-19)
OSF – Official Statistics of Finland
PPP – Purchasing Power Parity
RER – Real Exchange Rate
SBV – State Bank of Vietnam
SRAS - Short Run Aggregate Supply
QE – Quantitative Easing
TGC – The Governing Council (of European Central Bank)
 TLRTOs – Targeted Long-term Refinancing Operations

Macroeconomic Snapshot

Over 2008-2018 period, Finland’s GDP growth experienced strong fluctuations. In 2008, global financial crisis
hit Finland hard, with GDP growth plummeting to -8.1% (2009). Though rebounding, Finland continued facing
major difficulties in electronic, forest industries along with Russia recession (OECD 2018). Thanks to sound
fiscal policy settings, it recovered to 3.1% (2017), yet is forecast to slow down around 1% in upcoming years
(Foreigner.FI 2019a).
Finland’s inflation rate ranked at 43th in 2017 (CIA n.d.a), among lowest-inflation-rate countries. After
financial crisis, inflation rate closely followed economic cycle, averaging 1.7% (BOF 2018a). Maintaining
inflation rate around 2% is also Finland’s main target in long-term vision(*). (BOF n.d.).

For unemployment rate, Finland ranked at 123 th (2017) (CIA n.d.b), comparatively high among EU nations.
Since 2015, the rate has fallen substantially to below 7.5% as job destruction ebbed and employment flow
slowed down (BOF 2018b).
The already-weakening Finnish economy in 2019, doubled with COVID-19 effects, has severely dampened
GDP growth, which contracted by 4.5% in Q2-2020 (Findicator 2020). Its annual 2020 GDP growth is predicted
to be around -6% (Statista 2020a). Besides, with weak consumption and oil price reduction, inflation rate is
recorded much lower with -0.25% Q2/2020 compared to 1.3% Q2/2019 (OSF 2020b). OSF also estimates that
unemployment rate went up rapidly to 6.75% Q2/2020 (OSF 2020c).

Monetary-Policy Analysis
Since Finland’s central bank functions as one part in ECB, its monetary policies consistently followed ECB’s
strategies, whose target is maintain price stability for protecting Euro’s purchasing power (*). Since March
2016, ECB has kept Finland’s interest rates remain low, with MRO rate staying at 0%, lending rate 0.25% and
deposit rate -0.5%. As ECB’s key interest rates are kept around 0%, ECB stimulates economic activities with
Quantitative Easing approach, specifically by purchasing financial assets and bonds from banks, government,
non-bank corporations, including in Asset Purchase Programme(APP). Combined with APP, TLRTOs
(refinancing operations) is also introduced to encourage bank lending to firms (Appendix B). In fact, BOF has
applied both programmes for five years (BOF n.d.c).
Under COVID-19 situation, BOF further expanded policies with new program named PEPP to inject larger
money amount, from 60→750 billion EUR: first, it supports liquidity by purchasing 1 billion EUR short-term
corporate bonds which are commercial paper; it lowers structural buffer requirements of credit institutions by
1 ppt, thus increasing lending capacity by 52 billion EUR for international and 30 billion EUR for domestic firms
(IMF 2020); TGC also expands range of eligible assets, making all commercial papers available for
purchase(Europa 2020a). These methods, as a result, significantly alter money supply, which witnesses a
rocket to 23905.2 billion EUR in July/2020 (Appendix C).

Impact Evaluation
Initially, detrimental effects of COVID-19 shift both SRAS and AD leftward, which generates a new equilibrium
A positioning on LRAS’s left side at lower price (P1) and lower output (Y1). It implies the economy currently
faces recession.
Since BOF conducts expansionary monetary policy, money supply expands, causing the MS curve to shift to the
right (MS1→MS2), as a result, leading to fall in MD and equilibrium interest-rate (R1→R2). According to the
interest-rate effect, lower interest-rate prompts businesses to borrow more money for investing in capital or
purchasing products, resulting in greater consumption and investment. With that effect, AD accordingly rises
and shifts back to the right side. Equilibrium point A now shifts to new equilibrium point B, at which price
increases(P1→P2) and output returns to natural rate level(Y1→Y2). Therefore, MP implementation can attain
both ECB’s objectives of positive inflation rate and output (GDP) recovery.
Theoretically, expansion in MS boosts business investment and consumer spending. With SRAS, it was on the
decrease, indicated by declining total output (Appendix D) and worker’s contribution. However, Finland
observed opposite characteristics in AD as household spending plummets to -9.98% Q2/2020 (Appendix E) and
domestic investment contracts sharply by -0.6% for Q1/2020 (Appendix F). This stems from the widespread
lockdown during the period that lowered consumer and business optimism index. Conclusively, QE policy can
navigate current economic problems; yet contradiction between real-data and theory suggests the approach
requires more time or money injection to begin taking effects on AD.
Therefore, a more drastic programme like PEPP comes as an appropriate response for Finland, considering
that on June 4th, TGC has updated PEPP’s envelope to 1,350 billion EUR (Europa 2020b). It is evident that new
upgradation works well since inflation rate has returned to positive value after June 2020 – 0.2% (August),
0.6% (July) (Appendix G), gradually bridging the gap with inflation-target. Furthermore, both short-term and
long-term interest-rates are recorded to fall dramatically as an effect of MS expansion (Appendix H, I),
promising higher borrowing rate in future and rebound in GDP (Appendix J). The big challenge is MP not
always immediately effective due to external factors; particularly, Statista (2020b) forecast the saving rate only
re-reach pre-pandemic level (12%) in late of 2022 (Appendix K). Overall, BOF’s monetary policies prove to be
efficient by keeping AD growth and inflation, yet timely and responsive policies from BOF are in great need to
counter external effects.

Policy Comparison
Finland Vietnam
(Bank of Finland) (State Bank of Vietnam)
Both possess similar MP characteristics like re-financing, which are effective and
straightforward until the crisis. Regarding COVID-19, these two are among nations
Similarities
least impacted by pandemic and easing social restriction early: April 23 th
(Vietnam), May 4th(Finland). Also, their MPs all aim at achieving inflation-target
frameworks and sustaining economic growth.
Differences
High-income country with modest Low-middle income country with
growth. fastest-growing rate in Asia-Pacific.
Macroeconomics Policy interest-rate approaching 0%. Policy interest-rate around 6%.
Situation 2%-inflation target. 4%-inflation target.
(2016-2020) Impact by COVID-19 is more severe: GDP Among strongest performers in crisis:
5.6% contraction (2020), growth 3.5% GDP 2.7% expansion (2020), growth
(2021F), net exports was hit most. 7.5% (2021F), consumption was deeply
contracted.
Quantitative Easing: Monetary Easing with Tightening:
Policies money injection through financial-assets banks directly slash several interest-
implemented purchase, indirectly reducing interest- rates: refinancing rate (6%→4%),
rate level. deposit-rate (5%→4.25%), discount-

rate (3.5%→2.5%)
2016-2019:straightforward, multi- 2016-2019: Flexible, proactive,
faceted, consistent MPs well-stabilizes cautious MPs stimulates great
Economic price and maintains positive GDP. economic growth and AD.
Impact COVID-19: Inflation rate shows recovery
and under control; yet, AD is still COVID-19: Inflation rate and AD are
decreasing. both well under control.
PPP Test

PPP theory states that a unit of currency in one country is able to buy same basket of goods in other countries,
with RER being equal to 1. However, RER of all commodities are tested different from 1 (Table 2), meaning
that PPP does not hold, which implies inequality in VND and Euro’s purchasing power, and current NER
between VND and Euro not accurately reflects different price levels.
It is recommended that Big Mac, iPhone, Starbucks and Levi’s jeans be bought in Vietnam since their RERs are
larger than 1, indicating those items are more expensive in Finland. The only item which should be bought in
Finland is LV bag. With this price difference, people can buy items at low price in Vietnam but sell with higher
price in Finland, making arbitrage possible in the case. However, there exists certain limitations when
exploiting arbitrage activities. Specifically, some of the goods are non-tradable, which are Big Mac and Tall
Latte since they are easily perishable and contain service and rental components. Moreover, extra costs
imposed when conducting arbitrage should be taken into account. For instance, transportation cost is
outstandingly high in Finland (EI 2018) and all mentioned goods are liable to Vietnamese export tax (Shira
2020), resulting in higher prices after export.

Reflection
In his talk, Mr. Le Ky Anh addressed FTA and how its implementation can affect multiple aspects in the
economy. Firstly, FTA is introduced as a method of eliminating trade-barriers created for protecting domestic
products. By implementing FTA, though the government budget is reduced considerably, on consumer level, it
provides access to cheaper, high-quality products. FTA also ensures fair competition at which foreign and
domestic products are equally treated in the market. Regardings legal framework, FTA reinforces rules
uniformity, which requires transparency for firms to be well-notified.
It is mentioned FTA can boost economic growth (GDP). For deeper analysis, tax-import elimination creates
prime opportunities for foreign companies to invest, thus raising FDI. Because there exists economic activity
expansion, more jobs arise and employment rate increases as a consequence. Besides, free trade-barrier
allows advanced technology flooding in, which he mentioned that updated technological applications raise
productivity, as stated in Production Function. In the meanwhile, customers are approaching more
competitively-priced products with outstanding quality, resulting in greater consumption spending, thereby
uplifting AD. These changes would significantly contribute to GDP growth, which central banks can take
advantage of by lowering interest-rate through MP. In doing so, firms would capture the opportunity by
investing more while consumers save less, thus casting double positive effects on GDP.
Additionally, since Vietnam is an open-economy involving trading actions, FTA enhances these activities’s
value by opening almost free-trade conditions. As he discussed, the free-trade market generates a win-lose
situation in which consumers, competitive exporters being winners, and uncompetitive domestic firms being
losers (Appendix L). The talk ends with discussion of advanced FTAs, which is EUVTA allowing Vietnam to gain
many competitive advantages in Europe landscapes. As trade value between Finland and Vietnam
accumulates to 410 million Euro, Vietnam expects FTA with Finland will facilitate more trade and attain bigger
goals (Foreigner.FI 2019b).
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Appendix

Appendix A. Volume change of GDP from the previous quarter, seasonally adjusted, per cent
Reproduced from: OSF 2020a.
Appendix B. Asset Purchase Programme of ECB
Reproduced from: Niemela & Vaiimaki 2020.
 Appendix C. The rise in Finland Money Supply M0. Unit: EUR million
Reproduced from: Trading Economics 2020a.

Appendix D. Working-day adjusted change of total output from previous year’s corresponding month, %
Adapted from: OSF 2020g.
 Q2/ 2019 Q1/2020 Q2/2020

Values 0.84% -1.12% -9.98%

Appendix E. Household Private Expenditures in Finland

Reproduced from: Moody’s Analytics 2020.

Appendix F. Changes in supply and demand items in the second quarter of 2020 compared to the previous
quarter, seasonally adjusted, percent (%).
Adapted from: OSF 2020e.
 Appendix G. Inflation rate in Finnish economy
Adapted from: Trading Economics 2020b. Source: Official Statistics of Finland.

Appendix H. Short-term interest rates in Finland.

Reproduced from: OECD Data 2020a.
Appendix I. Long-term interest rates in Finland.
Reproduced from: OECD Data 2020b.

Appendix J. GDP Forecast in year 2021.

Reproduced from: Statista 2020b.
 Appendix K. The trend in household saving rate.
Reproduced from: Europa 2020b.

Appendix L. The steady increase in final consumption expenditure in Vietnam (current US$).
Reproduced from: World Bank 2019.
Appendix M. Winner and Losers when the country applies FTA.
Reproduced from: Pettinger 2018.