Research Discussion Papers, Bank of Finland
Kiss me deadly: From Finnish great depression to great recession
(), Markus Haavio
() and Juha Kilponen
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; (follow links to similar papers)
JEL-Codes: E32; E44; O52; (follow links to similar papers)
42 pages, October 15, 2014
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