Can large trade shocks cause crises? The case of the Finnish-Soviet trade collapse

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Title: Can large trade shocks cause crises? The case of the Finnish-Soviet trade collapse
ISBN: 978-952-323-274-7
Author: Gulan, Adam ; Haavio, Markus ; Kilponen, Juha
Organization: Bank of Finland
Series: Bank of Finland Research Discussion Papers
ISSN: 1456-6184
Series year: 2019
Series number: 9/2019
Year of publication: 2019
Publication date: 5.6.2019
Pages: 107
Subject (yso): kriisit; ulkomaankauppa; häiriöt; lama; rahoitusmarkkinat; taloudelliset kriisit; taloushistoria
Keywords: Suomi; Neuvostoliitto
Other keywords: trade shock; natural experiment; financial propagation; great depressions; small open economy
Abstract: We study macroeconomic consequences of a major trade disruption using the example of the Finnish-Soviet trade collapse in 1991. This is a rare case of a well-identified large trade shock in a developed economy. We find that the shock had a significant effect on Finnish output. While the direct trade channel effect was rather moderate, the shock led to significant tightening of financial conditions. It was therefore endogenously amplified due to the propagation through the domestic financial sector. Even so, the trade collapse was insufficient to generate an all-out economic crisis. It can account for only a part of the Finnish Great Depression (1990 − 1993). The crisis was triggered and prolonged by the meltdown of the overheated financial and banking sectors since 1989. We show that the financial system remained a major independent source of shocks throughout the depression.
Rights: https://helda.helsinki.fi/bof/copyright


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