A model for capital movements in Finland's balance of payments

Abstract

In this paper a disaggregated quarterly model for capital movements in Finland's balance of payments is presented. This model is one block of the Bank of Finland quarterly econometric model of the Finnish economy. The structural equations are seen, in the case of Finland, mainly from the demand side. These equations are derived using the expected utility framework. However, supply conditions, in the form of domestic credit rationing and especially in the form of extensive controls on international capital movements, also play a considerable role. The model has been estimated by ordinary least squares, using quarterly seasonally adjusted data for the period 1961–1971 and has been submitted to an ex-ante forecast test for the years 1971–1974. Portfolio theory seems, on balance, to explain Finland's foreign long-term and short-term capital movements quite satisfactorily. However, the interest rate effects are often quite weak. This might be attributed to the empirical difficulties of treating risk factors and the tightness of credit.