IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

Financial factors in the boom-bust episode in Finland in the late 1980s and early 1990s

Registered author(s):

    This paper proposes a framework for studying the boom and bust in Finland in the late 1980s and early 1990s. We develop a small open economy DSGE model with balance sheet-constrained firms à la BGG and calibrate it to the Finnish economy. We use the model to simulate three events that are claimed to have played a key role in the Finnish boom-bust episode and compare the model outcome with actual Finnish data. Firstly, we assess in our DSGE framework the role of financial market deregulation in the 1980s in the boom that preceded the crises. Secondly, we use our model to evaluate the negative impact of the collapse of Soviet-Finnish trade at the beginning of 1991. Thirdly, we investigate the effect of the collapse of the fixed exchange rate regime in September 1992. We conclude that financial frictions combined with the shocks that hit the Finnish economy are able to produce a boom and a severe depression similar to the one observed in Finland in the late 1980s and early 1990s. A key finding is the crucial role played by the financial accelerator mechanism in the ability of the model to mimic the response of the Finnish economy to the shocks it encountered. A key contribution is the incorporating unconventional shocks into the model: domestic financial market shocks to capture the deregulation of the financial market; a capital obsolescence shock to model the sudden redundancy of Soviet-oriented manufacturing; and a shock from the international financial market, a country borrowing premium shock, to capture the collapse of the fixed exchange rate regime.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL:
    Download Restriction: no

    Paper provided by Bank of Finland in its series Research Discussion Papers with number 1/2011.

    in new window

    Length: 42 pages
    Date of creation: 04 Feb 2011
    Date of revision:
    Handle: RePEc:hhs:bofrdp:2011_001
    Contact details of provider: Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
    Web page:

    More information through EDIRC

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:hhs:bofrdp:2011_001. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Minna Nyman)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.