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Modeling great depressions: the depression in Finland in the 1990s

  • Juan Carlos Conesa
  • Timothy J. Kehoe
  • Kim J. Ruhl

This article is a primer on the great depressions methodology developed by Cole and Ohanian (1999, 2007) and Kehoe and Prescott (2002, 2007). We use growth accounting and simple dynamic general equilibrium models to study the depression that occurred in Finland in the early 1990s. We find that the sharp drop in real GDP over the period 1990?93 was driven by a combination of a drop in total factor productivity (TFP) during 1990?92 and of increases in taxes on labor and consumption and increases in government consumption during 1989?94, which drove down hours worked in Finland. We attempt to endogenize the drop in TFP in variants of the model with an investment sector and with terms-of-trade shocks but are unsuccessful.

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Article provided by Federal Reserve Bank of Minneapolis in its journal Quarterly Review.

Volume (Year): (2007)
Issue (Month): Nov ()
Pages: 16-44

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Handle: RePEc:fip:fedmqr:y:2007:i:nov:p:16-44:n:v.31no.1
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  1. Douglas Gollin, 2002. "Getting Income Shares Right," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 458-474, April.
  2. Timothy J. Kehoe & Kim J. Ruhl, 2008. "Are Shocks to the Terms of Trade Shocks to Productivity?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 804-819, October.
  3. Correia, Isabel & Neves, Joao C & Rebelo, Sérgio, 1994. "Business Cycles in a Small Open Economy," CEPR Discussion Papers 996, C.E.P.R. Discussion Papers.
  4. Fumio Hayashi & Edward C. Prescott, 2004. "The 1990s in Japan: a lost decade," Chapters, in: The Economics of an Ageing Population, chapter 2 Edward Elgar.
  5. repec:ucp:bknber:9780226304557 is not listed on IDEAS
  6. Petri Böckerman & Jaakko Kiander, 2002. "Determination of Average Working Time in Finland," LABOUR, CEIS, vol. 16(3), pages 557-568, 09.
  7. Timothy J. Kehoe & Edward C. Prescott, 2002. "Great Depressions of the Twentieth Century," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(1), pages 1-18, January.
  8. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2005. "Sudden stops and output drops," Staff Report 353, Federal Reserve Bank of Minneapolis.
  9. Koskela , Erkki & Uusitalo , Roope, 2004. "Unintended convergence – how Finnish unemployment reached the European level," Research Discussion Papers 6/2004, Bank of Finland.
  10. Richard Rogerson, 2007. "Taxation and Market Work: Is Scandinavia an Outlier?," NBER Working Papers 12890, National Bureau of Economic Research, Inc.
  11. Gary D. Hansen & Edward C. Prescott, 1992. "Recursive methods for computing equilibria of business cycle models," Discussion Paper / Institute for Empirical Macroeconomics 36, Federal Reserve Bank of Minneapolis.
  12. Sergio T. Rebelo, 1990. "Long Run Policy Analysis and Long Run Growth," NBER Working Papers 3325, National Bureau of Economic Research, Inc.
  13. Harold L. Cole & Lee E. Ohanian, 1999. "The Great Depression in the United States from a neoclassical perspective," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-24.
  14. Greenwood, J. & Hercowitz, Z. & Krusell, P., 1998. "The Role of Investment-Specific Technological Change in the Business Cycle," RCER Working Papers 449, University of Rochester - Center for Economic Research (RCER).
  15. Mendoza, Enrique G. & Razin, Assaf & Tesar, Linda L., 1994. "Effective tax rates in macroeconomics: Cross-country estimates of tax rates on factor incomes and consumption," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 297-323, December.
  16. Fumio Hayashi & Edward C. Prescott, 2002. "Data Appendix to The 1990s in Japan: A Lost Decade," Technical Appendices hayashi02, Review of Economic Dynamics.
  17. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
  18. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June.
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