INCORPORATING COINTEGRATION RELATIONS IN A SHORT-RUN MODEL OF THE FINNISH SAWLOG MARKET

This paper reports on the results of a simultaneous equations sawlog m arket model using monthly data for Finland in 1985-1997. Johansen's mu ltivariate method is used to estimate cointegration vectors, which are then included in a dynamic error-correction model. Rank tests indicat e two cointegrating vectors, which is theoretically consistent with th e demand and supply equations. In the sawlog demand, the equilibrium i s established for sawlog stumpage price and quantity and sawn wood pri ce and capital stock, while the supply function in a perfect capital m arket entails sawlog price and quantity, real interest rate, and the e ffect of increasing timber stock as captured by a Linear trend. Contra ry to earlier findings, stumpage price seems to have a positive effect on sawlog supply, both in the short and long run, while only the long -run price effect is present in the sawlog demand. Disequilibrium in d emand is corrected within one quarter, while the speed of adjustment i s found to be slow in the sawlog supply.