Kanniainen, Vesa; Mellin, Ilkka
(HECER, Helsinki Center of Economic Research, 2017)
HECER, Discussion Paper, No. 408
The aggregate economic development of Finland and Sweden defined by the growth of the real Gross Domestic Products (GDPs) advanced in tandem for a long time. The current paper provides a descriptive statistical analysis producing stylized facts of the co-development of the two neighboring countries. Using various statistical techniques, the paper documents that the tandem is over. The paper identifies the break-up point in 2007 when the financial crisis started to culminate peaking in 2008-2009. The key test on the duration of the economic tandem will be provided by the forecast ability of the statistical vector autoregressive model to be identified and estimated for GDPs of the two countries.
The stability of the model is used as a statistical criterion. A rich set of results on the comparative volatility and instability, the steepness of recessions, and the diverging welfare of the two economies are reported. In particular, it is estimated that the cumulative welfare gap between the countries, measured by the cumulative prediction error of the model in the post-tandem period 2008/1 - 2015/1 is 47.9 per cent.