The economic crisis of the 1990s in Finland

Authors: Honkapohja S.¹; Koskela E.²

Source: Economic Policy, Volume 14, Number 29, October 1999 , pp. 399-436(38)

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Abstract:

In the 1990s, Finland underwent a deep depression as its GDP dropped about 14% and unemployment rose from 3 to almost 20%. This is a story of bad luck and bad policies. Bad luck took the form of external shocks: the collapse of trade with the former Soviet Union in 1991, but also sharp cycles in the OECD area. However, bad luck is far from being the whole story. In the absence of bad policies, Finland would have experienced a recession, not a depression. Bad policies included a poorly designed financial regulation and mistaken reactions to the onset of the crisis. Of particular interest is the role of financial factors in triggering the crisis and aggravating the effects of bad policies. Not only were consumption and investment spending hurt by the credit crunch, but there is evidence that the private sector’s indebtedness has increased structural unemployment, which explains why the recovery is proceeding with few job creations. A number of general lessons emerge. They concern the deregulation of financial markets, the policy reaction to massive capital inflows and the role of employment policies.

Language: English

Document Type: Research article

Affiliations: 1: Department of Economics and RUESG, University of Helsinki, and CEPR 2: Department of Economics and RUESG, University of Helsinki

Publication date: 1999-10-01