TY  - JOUR
AU  - Gorodnichenko,Yuriy
AU  - Mendoza,Enrique G.
AU  - Tesar,Linda L.
TI  - The Finnish Great Depression: From Russia with Love
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14874
PY  - 2009
Y2  - April 2009
UR  - http://www.nber.org/papers/w14874
L1  - http://www.nber.org/papers/w14874.pdf
N1  - Author contact info:
Yuriy Gorodnichenko
Department of Economics
508-1 Evans Hall #3880
University of California, Berkeley
Berkeley, CA 94720-3880
Tel: 510/643-0720
Fax: 510/642-6615
E-Mail: ygorodni@econ.berkeley.edu

Enrique G. Mendoza
Department of Economics
University of Maryland
College Park, MD 20742
Tel: 301/405-3845
Fax: 301/405-7835
E-Mail: mendozae@econ.umd.edu

Linda Tesar
Department of Economics
University of Michigan
Ann Arbor, MI  48109-1220
Tel: 734/763 6015
Fax: 734/764-2769
E-Mail: ltesar@umich.edu
AB  - 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.
ER  -