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

Author

Listed:
  • Kuusi Tero

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

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.

Suggested Citation

  • Kuusi Tero, 2019. "The Finnish Great Depression of the 1990s: reconciling theory and evidence," The B.E. Journal of Macroeconomics, De Gruyter, vol. 19(2), pages 1-29, June.
    • Handle: RePEc:bpj:bejmac:v:19:y:2019:i:2:p:29:n:6
    DOI: 10.1515/bejm-2018-0026
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    References listed on IDEAS

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    More about this item

    Keywords

    business cycles; depression; transition; industrial policy;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • P20 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - General

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