Browsing by Subject "export demand"

Forest industries of many forest-rich Nordic nations have traditionally been highly export oriented, where domestic demand is not sufficient to guarantee the existing production capacity. Under these circumstances the exchange rate, the value of the domestic currency relative to that of the trading partners, becomes then one of the most important macroeconomic considerations. In the short run it determines the profitability and competitiveness, and thus each firm’s survival. In the long run, firms may e.g. hedge against unfavourable currency fluctuations or anticipate future currency developments and stipulate them in their long-term sales contracts. Firms also have the possibility to act strategically by absorbing some or all of a currency change in export prices and this way affecting traded quantities. Although theoretical contributions to the literature fail to conclusively validate this hypothesis and the results of empirical estimations are widely mixed, studies concerning forest products trade have often found evidence of exchange rate effects on traded quantities. Previous studies concerning Finnish forest product exports have reported the use of exchange rate changes to alter prices in the buyer’s currency, especially as a consequence of deliberate currency fixing. For example devaluations, often used to downsize the effect of a rising domestic cost level, have increased the price competitiveness and export quantities of Finnish forest industry firms. Realization of the third phase of the European Economic and Monetary Union (EMU) on the beginning of 1999 merged the participating countries’ currencies into the euro at an irrevocable fixed rate, which then eliminated the possibility to independently realign the currency value. Moreover, exchange rate effects, and hence exchange rate risks, have exclusively been vanished from intra-EMU trade. This has meant the opening of a whole new market for many small open economies. At the same time, a change in the business environment could have caused severe adaptation problems to some Finnish forest industry firms. The aim of the present study is to examine the effects of Finland’s EMU participation on its sawnwood exports to the main export markets in United Kingdom and Germany. As Finland’s most important competitor Sweden decided to remain outside the monetary union, it was chosen to serve as a reference point for the possible effects the loss of an independent monetary policy has had. Weakening of the krone against the euro for the past years has brought additional interest on the topic. The emphasis is on studying relative prices and its effects on traded quantities through the long-run exchange rate pass-through phenomenon for the period 1995- 2008. The empirical estimation is carried out by applying Johansen’s cointegration method for the separate partial equilibrium model systems, for each bilateral trade of Finland and Sweden to both destination markets. The results give evidence that Finnish sawnwood exports have been affected to a great extent by currency movements. Depreciations of the euro have boosted export demand, whereas appreciations have, in turn, dampened imports from Finland. The pricing strategy exploited by Swedish exporters has been somewhat opposite to Finnish exporters’. This has meant both a more stable price for Swedish sawnwood importers and export demand faced by Swedish exporters. These findings further suggest only minor negative effects of Swedish krone depreciations on Finnish sawnwood firms’ price competitiveness. Nevertheless, Swedish exporters have been able to achieve higher profits, which seems to have been an important consideration behind some recent shifts of production from Finland to Sweden.