Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/35312
Authors: 
Gorodnichenko, Yuriy
Mendoza, Enrique G.
Tesar, Linda L.
Year of Publication: 
2009
Series/Report no.: 
IZA discussion papers 4113
Abstract: 
During the period 1991-93, Finland experienced the deepest economic downturn in an industrialized country since the 1930s. We argue that the culprit behind this Great Depression was the collapse of Finnish trade with the Soviet Union, because it induced a costly restructuring of the manufacturing sector and a sudden, large increase in the cost of energy. We develop and calibrate a multi-sector dynamic general equilibrium model with labor market frictions, and show that the collapse of Soviet-Finnish trade can explain key features of Finland's Great Depression. We also show that Finland's Great Depression mirrors the macroeconomic dynamics of the transition economies of Eastern Europe. These economies experienced a similar trade collapse. However, as a western democracy with developed capital markets and institutions, Finland faced none of the large institutional adjustments that other transition economies experienced. Thus, by studying the Finnish experience we isolate the adjustment costs due solely to the collapse of Soviet trade.
Subjects: 
Business cycles
depression
trade
Soviet
reallocation
multi-sector model
JEL: 
E32
F41
P2
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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