The Finnish Great Depression: From Russia with Love
University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); Institute for the Study of Labor (IZA)
Enrique G. Mendoza
University of Pennsylvania; National Bureau of Economic Research (NBER)
Linda L. Tesar
University of Michigan at Ann Arbor - Department of Economics; National Bureau of Economic Research (NBER)
April 3, 2009
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.
Number of Pages in PDF File: 61
Keywords: business cycles, depression, trade, Soviet, reallocation, multi-sector model
JEL Classification: E32, F41, P2working papers series
Date posted: April 4, 2009
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