The Finnish Great Depression: From Russia with Love

Yuriy Gorodnichenko, Enrique Mendoza and Linda Tesar ()

No 14874, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: During the period 1991-93, Finland experienced the deepest economic downturn in an industrialized country since the 1930s. We argue that the culprit behind this Great Depression was the collapse of Finnish trade with the Soviet Union, because it induced a costly restructuring of the manufacturing sector and a sudden, large increase in the cost of energy. We develop and calibrate a multi-sector dynamic general equilibrium model with labor market frictions, and show that the collapse of Soviet-Finnish trade can explain key features of Finland's Great Depression. We also show that Finland's Great Depression mirrors the macroeconomic dynamics of the transition economies of Eastern Europe. These economies experienced a similar trade collapse. However, as a western democracy with developed capital markets and institutions, Finland faced none of the large institutional adjustments that other transition economies experienced. Thus, by studying the Finnish experience we isolate the adjustment costs due solely to the collapse of Soviet trade.

JEL-codes: E32 F41 P2 (search for similar items in EconPapers)
Date: 2009-04
New Economics Papers: this item is included in nep-cis, nep-dge, nep-his, nep-mac and nep-tra
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Citations: View citations in EconPapers (15)

Published as Yuriy Gorodnichenko & Enrique G. Mendoza & Linda L. Tesar, 2012. "The Finnish Great Depression: From Russia with Love," American Economic Review, American Economic Association, vol. 102(4), pages 1619-44, June.

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Journal Article: The Finnish Great Depression: From Russia with Love (2012)
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