Exchange rate changes and the Finnish sawnwood demand and price in the UK market

Abstract

This paper examines the long-run influence of exchange rate changes on the Finnish sawnwood price in the United Kingdom (UK) using quarterly data for the period 1978–1994. The degree of influence was measured by a pass-through coefficient (PT) obtained from a markup pricing relation of a system model. The model, which included export demand and price equations, was estimated with the cointegration method of Johansen. The results indicated a large PT, which means that exchange rate changes are reflected almost proportionately in Finnish export price expressed in pounds sterling. Thus, the Finnish price of sawnwood in pounds has lowered as a result of depreciation of the Finnish markka (FIM). This has improved Finnish competitiveness and market share in the UK. Appreciation of the FIM has had the opposite effect. It seems that Finnish exporters have made use of depreciations and devaluations of the FIM to maintain and increase their market shares but not necessarily their markups. For Finland, which is in the process of joining the European economic and monetary union (EMU), knowing the size of the PT is also important in assessing the economic impact of membership.