The Finnish Great Depression: From Russia with Love

Yuriy Gorodnichenko, Enrique Mendoza and Linda Tesar ()

No 4113, IZA Discussion Papers from Institute of Labor Economics (IZA)

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.

Keywords: reallocation; Soviet; trade; depression; business cycles; multi-sector model (search for similar items in EconPapers)
JEL-codes: E32 F41 P2 (search for similar items in EconPapers)
Pages: 63 pages
Date: 2009-04
New Economics Papers: this item is included in nep-dge, nep-his and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

Published - published in: American Economic Review 2012, 102(4), 1619-1643

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Journal Article: The Finnish Great Depression: From Russia with Love (2012)
Working Paper: The Finnish Great Depression: From Russia with Love (2009)
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