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

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.

B.E Journal of Macroeconomics (forthcoming).

Julkaisun tietoja

Päiväys
15.06.2018
Keywords
business cycles, depression, transition, industrial policy
JEL
E32, F41, P20
Kieli
Englanti
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