Dynamic Effects of Demand and Supply Disturbances on Thew Finnish Economy: Did Liberalization of Capital Movements Matter?

The purpose of this study is to analyze the dynamic effects of demand and supply disturbances on the Finnish economy.In addition, the study aims at finding out whether liberalization of capital movements affected the transmission of disturbances. The analysis is based on a vector autoregressive model for unemployment and the GNP from 1970.1 to 1990.4.The vector autoregressive representation is then transformed to a corresponding moving average representation and the dynamic effects of disturbances are analyzed by impulse response functions The model restricts the number of disturbances to two, called demand and supply disturbances.Estimation shows that demand disturbances have temporary effects on GNP and unemployment, the effects of supply disturbances on GNP are permanent but their effects on unemployment are temporary.As capital mobility increases the effects of demand disturbances die out faster.There is no significant difference in the short term effects of supply disturbances on GNP but the long term effects are magnified.This is in accordance with economic theory.