Eurosclerosis or Financial Collapse: Why Did Swedish Incomes Fall Behind?

26 Pages Posted: 8 Mar 2005

See all articles by Valerie Cerra

Valerie Cerra

International Monetary Fund (IMF)

Sweta C. Saxena

Bank for International Settlements (BIS) - Monetary and Economic Department

Date Written: February 2005

Abstract

Sweden represents an archetypal welfare state economy, with extensive government safety nets. Some scholars have attributed a decline in its per capita income ranking since 1970 to eurosclerosis or sluggish growth caused by distortionary policies. This paper argues rather, that the permanent loss in output following Sweden's banking crisis in the early 1990s explains the decline in its per capita GDP ratings. The paper finds no macroeconomic evidence that welfare state policies have deterred growth. The results warn that empirical growth analyses should distinguish between trend output growth and permanent output loss associated, for example, with financial crises.

Keywords: Financial Crisis, Welfare State, Sweden, Output Loss

JEL Classification: O52, F43, H11

Suggested Citation

Cerra, Valerie and Saxena, Sweta Chaman, Eurosclerosis or Financial Collapse: Why Did Swedish Incomes Fall Behind? (February 2005). IMF Working Paper No. 05/29, Available at SSRN: https://ssrn.com/abstract=680924 or http://dx.doi.org/10.2139/ssrn.680924

Valerie Cerra

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-8596 (Phone)

Sweta Chaman Saxena (Contact Author)

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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