Sweden went back to gold at the pre-war parity, whereas Finland returned at the existing rate, accepting the depreciation of the markka that had occurred over the war and early post-war years. The authors use a quantity-theory framework to investigate the results of the divergent exchange rate and monetary policies followed by the two countries. The Swedish economy was forced to undergo a severe contraction, while Finland escaped the need for such an adjustment at the cost of a higher rate of inflation, and enjoyed a post-war boom on the basis of its devalued currency. However, this was not the result of a deliberate choice on the part of the Finnish authorities: it was rather that the central bank lacked the resources needed to support the markka.
Keywords: boom, central bank, contraction, depreciation, exchange rate, Finland, inflation, monetary policy, quantity theory, Sweden