The Finnish Great Depression of the 1990s: reconciling theory and evidence

Kuusi Tero ()
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Kuusi Tero: The Research Institute of the Finnish Economy (ETLA), Arkadiankatu 23 B, 00100Helsinki, Finland, Phone: +358-41444814

The B.E. Journal of Macroeconomics, 2019, vol. 19, issue 2, 29

Abstract: This paper reconciles quantitative macroeconomic theory of the Finnish Great Depression and the empirical evidence. The main controversy is that the existing theoretical work assigns a larger role for the collapse of the trade with the Soviet Union than the empirical evidence would suggest. This paper argues that explaining the Finnish crisis warrants a model with involuntary unemployment, and that the collapse resulted mainly from increased financial constraints, not the Soviet trade collapse. While it has been argued and that a large Soviet-trade contribution would result from costly reallocation of resources away from the Soviet sector, and trade-induced income effects that hit the consumption in the domestic sector, this paper finds it hard to reconcile them with the actual evidence. The economic collapse was wide-spread, and the domestic sector collapse reflects decline in investment rather than consumption.

Keywords: business cycles; depression; transition; industrial policy (search for similar items in EconPapers)
JEL-codes: E32 F41 P20 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1515/bejm-2018-0026

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