IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/14874.html
   My bibliography  Save this paper

The Finnish Great Depression: From Russia with Love

Author

Listed:
  • Yuriy Gorodnichenko
  • Enrique G. Mendoza
  • Linda L. Tesar

Abstract

During the period 1991-93, Finland experienced the deepest economic downturn in an industrialized country since the 1930s. We argue that the culprit behind this Great Depression was the collapse of Finnish trade with the Soviet Union, because it induced a costly restructuring of the manufacturing sector and a sudden, large increase in the cost of energy. We develop and calibrate a multi-sector dynamic general equilibrium model with labor market frictions, and show that the collapse of Soviet-Finnish trade can explain key features of Finland's Great Depression. We also show that Finland's Great Depression mirrors the macroeconomic dynamics of the transition economies of Eastern Europe. These economies experienced a similar trade collapse. However, as a western democracy with developed capital markets and institutions, Finland faced none of the large institutional adjustments that other transition economies experienced. Thus, by studying the Finnish experience we isolate the adjustment costs due solely to the collapse of Soviet trade.

Suggested Citation

  • Yuriy Gorodnichenko & Enrique G. Mendoza & Linda L. Tesar, 2009. "The Finnish Great Depression: From Russia with Love," NBER Working Papers 14874, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:14874
    Note: EFG IFM ME
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w14874.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Yuriy Gorodnichenko & Enrique G. Mendoza & Linda L. Tesar, 2012. "The Finnish Great Depression: From Russia with Love," American Economic Review, American Economic Association, vol. 102(4), pages 1619-1644, June.
    2. William T. Dickens & Lorenz Goette & Erica L. Groshen & Steinar Holden & Julian Messina & Mark E. Schweitzer & Jarkko Turunen & Melanie E. Ward, 2007. "How Wages Change: Micro Evidence from the International Wage Flexibility Project," Journal of Economic Perspectives, American Economic Association, vol. 21(2), pages 195-214, Spring.
    3. Iara, Anna & Traistaru, Iulia, 2004. "How flexible are wages in EU accession countries?," Labour Economics, Elsevier, vol. 11(4), pages 431-450, August.
    4. George A. Akerlof & Andrew K. Rose & Janet L. Yellen & Helga Hessenius, 1991. "East Germany in from the Cold: The Economic Aftermath of Currency Union," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(1), pages 1-106.
    5. Gérard Roland, 2004. "Transition and Economics: Politics, Markets, and Firms," MIT Press Books, The MIT Press, edition 1, volume 1, number 026268148x, January.
    6. Gérard Roland & Thierry Verdier, 1999. "Transition and the output fall," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 7(1), pages 1-28, March.
    7. Enrique G. Mendoza & Linda L. Tesar, 1995. "Supply-Side Economics in a Global Economy," NBER Working Papers 5086, National Bureau of Economic Research, Inc.
    8. S. Men'shikov, 2000. "Development Scenarios for the Military-Industrial Complex," Problems of Economic Transition, Taylor & Francis Journals, vol. 42(10), pages 34-49.
    9. Finn, Mary G, 2000. "Perfect Competition and the Effects of Energy Price Increases on Economic Activity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 400-416, August.
    10. repec:taf:ceasxx:v:44:y:1992:i:2:p:237-263 is not listed on IDEAS
    11. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
    12. Lars Jonung, 2008. "Lessons from Financial Liberalisation in Scandinavia," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 50(4), pages 564-598, December.
    13. Nauro F. Campos & Abrizio Coricelli, 2002. "Growth in Transition: What We Know, What We Don't, and What We Should," Journal of Economic Literature, American Economic Association, vol. 40(3), pages 793-836, September.
    14. Seppo Honkapohja & Erkki Koskela, 1999. "The economic crisis of the 1990s in Finland," Economic Policy, CEPR;CES;MSH, vol. 14(29), pages 399-436, October.
    15. repec:taf:ceasxx:v:59:y:2007:i:1:p:137-162 is not listed on IDEAS
    16. Lucjan Orlowski, 1993. "Indirect transfers in trade among former Soviet Union Republics: Sources, patterns and policy responses in the Post‐Soviet period," Europe-Asia Studies, Taylor & Francis Journals, vol. 45(6), pages 1001-1024.
    17. Peter, Klara Sabirianova & Buttrick, Steve & Duncan, Denvil, 2010. "Global Reform of Personal Income Taxation, 1981–2005: Evidence From 189 Countries," National Tax Journal, National Tax Association;National Tax Journal, vol. 63(3), pages 447-478, September.
    18. Basu, Susanto & Fernald, John G, 1997. "Returns to Scale in U.S. Production: Estimates and Implications," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 249-283, April.
    19. Blanchflower, David G., 2001. "Unemployment, Well-Being, and Wage Curves in Eastern and Central Europe," Journal of the Japanese and International Economies, Elsevier, vol. 15(4), pages 364-402, December.
    20. Böckerman, Petri & Laaksonen, Seppo & Vainiomäki, Jari, 2006. "Micro-level evidence on wage rigidities in Finland," MPRA Paper 1811, University Library of Munich, Germany.
    21. Juan Carlos Conesa & Timothy J. Kehoe & Kim J. Ruhl, 2007. "Modeling great depressions: the depression in Finland in the 1990s," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Nov, pages 16-44.
    22. Baxter, Marianne, 1992. "Fiscal Policy, Specialization, and Trade in the Two-Sector Model: The Return of Ricardo?," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 713-744, August.
    23. Seppo Honkapohja & Erkki Koskela & Jouko Paunio, 1996. "The depression of the 1990s in Finland : an analytic view," Finnish Economic Papers, Finnish Economic Association, vol. 9(1), pages 37-54, Spring.
    24. Gabor Kertesi & Janos Kollo, 1997. "The Birth of the "Wage Curve" in Hungary, 1989-1995," William Davidson Institute Working Papers Series 104, William Davidson Institute at the University of Michigan.
    25. Groth, Charlotta, 2006. "Calibrating capital adjustment costs in the New-Keynesian model," Economics Letters, Elsevier, vol. 93(1), pages 26-30, October.
    26. 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 402-417, June.
    27. Mendoza, Enrique G & Tesar, Linda L, 1998. "The International Ramifications of Tax Reforms: Supply-Side Economics in a Global Economy," American Economic Review, American Economic Association, vol. 88(1), pages 226-245, March.
    28. Petri Böckerman & Roope Uusitalo, 2006. "Erosion of the Ghent System and Union Membership Decline: Lessons from Finland," British Journal of Industrial Relations, London School of Economics, vol. 44(2), pages 283-303, June.
    29. Repkine, Alexandre & Walsh, Patrick Paul, 1999. "Evidence of European Trade and Investment U-Shaping Industrial Output in Bulgaria, Hungary, Poland, and Romania," Journal of Comparative Economics, Elsevier, vol. 27(4), pages 730-752, December.
    30. Harold L. Cole & Lee E. Ohanian, 2004. "New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 112(4), pages 779-816, August.
    Full references (including those not matched with items on IDEAS)

    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • P2 - Economic Systems - - Socialist Systems and Transition Economies

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:14874. 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: (). General contact details of provider: http://edirc.repec.org/data/nberrus.html .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.