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The B.E. Journal of Macroeconomics

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1935-1690
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The Finnish Great Depression of the 1990s: reconciling theory and evidence

Tero Kuusi
  • Corresponding author
  • The Research Institute of the Finnish Economy (ETLA), Arkadiankatu 23 B, 00100 Helsinki, Finland, Phone: +358-41444814
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Published Online: 2018-06-15 | DOI: https://doi.org/10.1515/bejm-2018-0026

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

JEL Classification: E32; F41; P20

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About the article

Published Online: 2018-06-15


Funding Source: Horizon 2020 Framework Programme

Award identifier / Grant number: 649261

This research has received research support from the Finnish Cultural Foundation, and the Horizon 2020 Framework Programme of the European union under the grant agreement number 649261 (the Firstrun project).


Citation Information: The B.E. Journal of Macroeconomics, 20180026, ISSN (Online) 1935-1690, DOI: https://doi.org/10.1515/bejm-2018-0026.

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