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


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.

B.E Journal of Macroeconomics (forthcoming).

Publication info

business cycles, depression, transition, industrial policy
E32, F41, P20
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