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

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Titel: Can large trade shocks cause crises? The case of the Finnish-Soviet trade collapse
Författare: Gulan, Adam ; Haavio, Markus ; Kilponen, Juha
Institution: Bank of Finland
Serie: Bank of Finland Research Discussion Papers
Serienumber: 9/2019
Utgivningsår: 2019
Utgivningsdatum: 5.6.2019
Publicerad i: Published in Journal of International Economics 2021; 131; July
Sidor: 107
Subject (yso): kriisit; ulkomaankauppa; häiriöt; lama; rahoitusmarkkinat; taloudelliset kriisit; taloushistoria
Nyckelord: Suomi; Neuvostoliitto
Andra nyckelord: trade shock; natural experiment; financial propagation; great depressions; small open economy
Abstrakt: 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.

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