Can Large Trade Shocks Cause Crises? The Case of the Finnish-Soviet Trade Collapse

107 Pages Posted: 6 Jun 2019 Last revised: 18 Nov 2021

See all articles by Adam Gulan

Adam Gulan

Bank of Finland - Research

Markus Haavio

Bank of Finland - Research

Juha Kilponen

Bank of Finland - Research

Date Written: June 5, 2019

Abstract

We study macroeconomic consequences of a major trade disruption using the example of the Finnish-Soviet trade collapse in 1991. This is a rare case of a well-identified large trade shock in a developed economy. We find that the shock had a significant effect on Finnish output. While the direct trade channel effect was rather moderate, the shock led to significant tightening of financial conditions. It was therefore endogenously amplified due to the propagation through the domestic financial sector. Even so, the trade collapse was insufficient to generate an all-out economic crisis. It can account for only a part of the Finnish Great Depression (1990 − 1993). The crisis was triggered and prolonged by the meltdown of the overheated financial and banking sectors since 1989. We show that the financial system remained a major independent source of shocks throughout the depression.

Keywords: trade shock, natural experiment, financial propagation, great depressions, small open economy

Suggested Citation

Gulan, Adam and Haavio, Markus and Kilponen, Juha, Can Large Trade Shocks Cause Crises? The Case of the Finnish-Soviet Trade Collapse (June 5, 2019). Bank of Finland Research Discussion Paper No. 9/2019, Available at SSRN: https://ssrn.com/abstract=3399887 or http://dx.doi.org/10.2139/ssrn.3399887

Adam Gulan (Contact Author)

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

Markus Haavio

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

Juha Kilponen

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland
+358 10 831 2847 (Phone)
+358 10 831 2294 (Fax)

HOME PAGE: http://www.bof.fi/en/suomen_pankki/organisaatio/asiantuntijoita/kilponen_juha/

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