Modeling Great Depressions: The Depression in Finland in the 1990s (original) (raw)
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Review of Financial Economics, 2020
The paper reexamines the Finnish Great Depression of the 1990's, based on an open macro model, with specific dummy variables to identify the initial effects of liberalized financial markets and capital mobility, and of the Russian trade collapse. It is shown that the explosive credit expansion resulting from the simultaneous liberalization of the financial markets and international capital movements in 1986 has played the most important role in explaining the uncontrolled growth and the subsequent depression in 1989 in real economic activity in Finland. Their effects were strengthened by a vicious circle between the financial and asset markets. The Russian trade collapse in 1991 had a smaller partial effect on economic activity than did any other explanatory variable. The results suggest that some of the present day problems in the euro area, especially those occurring post-2008 in the 'Club Med' countries, are very alarming. In many cases, they are results of expansionary policies based on unsustainable capital imports, made possible by the introduction of the euro, and the consequences resemble in many ways those during the 1990's Great Depression period in Finland.
THE COLLAPSE OF SOVIET TRADE AND FINLAND'S GREAT DEPRESSION OF THE 1990'S: A RE-EXAMINATION
The paper re-examines the role of the collapse of Soviet/Russian trade in the Finnish depression of the 1990's, using time series analysis based on a theoretical open macro model. It is shown that empirically, the strong credit expansion resulting from the simultaneous liberalization of the domestic financial markets and international capital movements has played the most important role in explaining the changes in real economic activity in Finland during the time period analyzed. In fact, over a longer time period exports to Russia emerge as a countercyclical variable: slightly contractionary after the crazy years, and expansionary during the following depression.
Kiss Me Deadly: From Finnish Great Depression to Great Recession
SSRN Electronic Journal, 2000
We investigate the causes of the Finnish Great Depression, 1990Depression, -1993. We find that the collapse of the overheated financial and banking sectors starting in 1989 was the trigger of the economic crisis. Foreign shocks, which include the collapse of trade with USSR in 1991, can account for at most about half of the slump, and these shocks occurred only when the economy was already in free fall. Also, the deleveraging and restructuring process of the financial system substantially prolonged the subsequent recovery.
Finland and Its Northern Peers in the Great Recession
2016
The report focuses on the relative macroeconomic performance since the global financial crisis of six Northern European countries with a special emphasis on Finland. While fiscal and monetary policies have definitely impacted on macroeconomic outcomes in the six countries examined, as a whole they do not appear to be the key driving forces of the differences observed between the countries. The initial vulnerabilities, the nature of shocks and the resilience of the economies appear more important in explaining the differences. In particular, the weakness of growth in Finland can best be explained by a series of exceptional negative shocks in combination with a too weak capacity of the economy to improve its cost competitiveness in the absence of exchange rate flexibility.
2010
Great Depression in the 1930s. The Nordic countries have, with the exception of Norway, been hit harder than most. Due to its sharpness and depth, the crisis is opening up or reviving a broad agenda of important policy issues. This report raises a number of the issues and discusses the scope for economic policies to contribute to the resolution of key economic problems. The report can be seen as a sequel and as complementary to an earlier report on the Nordic Model, presented two years ago by a team including three of the authors of the present report. While the earlier report was focused on structural issues, the one at hand is about macroeconomic and financial issues. The members of the team are eminent economists and authoritative experts on the issues covered. The report is a joint product, reflecting extensive discussions and cross-comments on individual contributions. The efficiency and speed of the editing by Kimmo Aaltonen and Laila Riekkinen is without comparison. Financial...
2007
The aim of the study was to offer new insights into the structure and short-term development of Finnish industries during the 1920s and 1930s. The research was carried out through the construction of an input-output table describing the Finnish economy in 1928. This basic data was then expanded into an input-out put model. New data was used in order to identify structural interdependencies and the key industries, as well as their impact on the economic development during the Great Depression of the 1930s. Attention was also given to import dependency and the impact of tariffs on consumer prices. The new data made it possible to identify the key industries in the Finnish economy in the year in question: agriculture, forestry, the production of food, the manufacture of wood and paper products, and construction. It could be argued that food production is perhaps the most neglected area in Finnish eco nomic history, despite its great impact on the economy. Exports were more capital-intensive than imports. Even though caution should be exercised in terms of drawing conclusions about this interpretation, it was possible to quantify labour and capital input by industry in some detail. The input-output model was then used in order to estimate the impact of changes on final demand in the three key industries, namely the manufacture of wood products, the manufacture of paper products, and construction, covering the years 1928-1932. It was estimated that the sudden fall in house construction had a total negative impact of nearly 13 percent on the economy, which was greater than the impact caused by the decrease in the export of wood products. The role of private consumption was also found to be highly significant. The downturn in wood export, for example, caused an initial impact of-4 percent on the economy, while including household consumption in the model reduced total output by 10 percent. The results also confirmed conclusions from previous studies on the tariff pol icy in Finland. Food production was the most protected sector, while domes tic-market industries were among the losers. These industries were not able to benefit from the increased protection during the depression: on the contrary, it was shown that the tariffs were only able to slow down the fall in consumer prices. The study incorporates all the related statistical tables describing the Finnish economy in 1928, including supply and use tables, input-output tables, input coefficients, Leontief inverse matrices, and capital and labour coefficients.
Essays in Nonlinear Time Series Econometrics, 2014
Edmund Phelps (1994) introduced a modi…ed Phillips curve where the natural rate of unemployment is a function of the real interest rate instead of a constant. This proposition usually works well in normal times but is likely to break down during a balance sheet recession (Koo, 2010) such as the ones recently seen in many countries. In the late eighties, after having deregulated credit and capital movements, Finland experienced a housing boom which subsequently developed into a serious economic crisis similar to the recent ones. To learn from the Finnish experience we estimate the Phelps modi…ed Phillips curve and use a Smooth Transition (STR) model to distinguish between normal and nonnormal periods. 1 The theory of IKE predicts that speculation tends to drive the nominal exchange rate away from long-term Purchasing Power Parity (PPP) values and that this causes a compensating movement in the real interest rate di¤erential. Thus, according to IKE, the long swings of the real exchange rate are primarily due to speculation in foreign currency.