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Kiss me deadly: From Finnish great depression to great recession

Author

Listed:
  • 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. Keywords: business cycles, great depressions, financial shocks, sign restrictions, Finland

Suggested Citation

  • Gulan, Adam & Haavio, Markus & Kilponen, Juha, 2014. "Kiss me deadly: From Finnish great depression to great recession," Research Discussion Papers 24/2014, Bank of Finland.
  • Handle: RePEc:bof:bofrdp:2014_024
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    File URL: https://helda.helsinki.fi/bof/bitstream/123456789/13454/1/BoF_DP_1424.pdf
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    References listed on IDEAS

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    Cited by:

    1. Kaitila, Ville & Virkola, Tuomo, 2014. "Openness, Specialisation and Vulnerability of the Nordic Countries," ETLA Reports 21, The Research Institute of the Finnish Economy.
    2. Verona, Fabio & Martins, Manuel M.F. & Drumond, Inês, 2017. "Financial shocks, financial stability, and optimal Taylor rules," Journal of Macroeconomics, Elsevier, vol. 54(PB), pages 187-207.
    3. repec:bla:presci:v:96:y:2017:i:1:p:33-59 is not listed on IDEAS
    4. Berglund, Tom & Mäkinen, Mikko, 2016. "Learning from financial crisis: the experience of Nordic banks," Research Discussion Papers 30/2016, Bank of Finland.
    5. Kuusi, Tero, 2015. "The Finnish Great Depression of the 1990s: Soviet Trade or Home-Made?," ETLA Working Papers 32, The Research Institute of the Finnish Economy.
    6. Kilponen, Juha & Orjasniemi, Seppo & Ripatti, Antti & Verona, Fabio, 2016. "The Aino 2.0 model," Research Discussion Papers 16/2016, Bank of Finland.

    More about this item

    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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