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The Finnish Great Depression: From Russia with Love

2012; American Economic Association; Volume: 102; Issue: 4 Linguagem: Inglês

10.1257/aer.102.4.1619

1944-7981

Yuriy Gorodnichenko, Enrique G. Mendoza, Linda L. Tesar,

Regional Development and Policy

Why did Finland experience, in 1991–1993, the deepest recession observed in an industrialized country since the 1930s? Using a dynamic general equilibrium model with labor frictions, we argue that the collapse of the Soviet-Finnish trade was a major contributor to the contraction. Finland's experience mirrors that of the transition economies of Eastern Europe, which suffered similar deep recessions coupled with institutional changes. By focusing on the Finnish case, we isolate the effects of the Finnish-Soviet trade collapse and shed new light on the sources of recessions in transition economies.