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Kiss me deadly: From Finnish great depression to great recession

Author

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  • Gulan, Adam
  • Haavio, Markus
  • Kilponen, Juha

Abstract

We investigate the causes of the Finnish Great Depression, 1990-1993. 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. Our methodology involves estimating a structural VAR model with sign and exogeneity restrictions. Importantly, we are able to distinguish between financial shocks affecting the demand for intermediated loans and those shifting the loan supply curve. Hence we also contribute to the discussion on which financial shocks actually matter.

Suggested Citation

  • Gulan, Adam & Haavio, Markus & Kilponen, Juha, 2014. "Kiss me deadly: From Finnish great depression to great recession," Bank of Finland Research Discussion Papers 24/2014, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp2014_024
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    References listed on IDEAS

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    Cited by:

    1. Kilponen, Juha & Orjasniemi, Seppo & Ripatti, Antti & Verona, Fabio, 2016. "The Aino 2.0 model," Bank of Finland Research Discussion Papers 16/2016, Bank of Finland.
    2. Berglund, Tom & Mäkinen, Mikko, 2016. "Learning from financial crisis: the experience of Nordic banks," Bank of Finland Research Discussion Papers 30/2016, Bank of Finland.

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    More about this item

    Keywords

    business cycles; great depressions; financial shocks; sign restrictions; Finland;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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