April 30, 2012, 17:00–18:30
Toulouse
Room Amphi S
Political Economy Seminar
Abstract
Why did Finland experience in 1991-93 the deepest recession observed in an industrialized country since the 1930s? Using a dynamic general equilibrium model with labor frictions, we argue the reason was the costly restructuring of the manufacturing sector and sharp increase in energy costs caused by the collapse of trade with the USSR. 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 Soviet trade collapse and shed new light on the sources of recessions in transition economies.