Modeling Great Depressions: The Depression in Finland in the 1990s
This paper is a primer on the great depressions methodology developed by Cole and Ohanian (1999, 2007) and Kehoe and Prescott (2002, 2007). We use growth accounting and simple dynamic general equilibrium models to study the depression that occurred in Finland in the early 1990s. We find that the sharp drop in real GDP over the period 1990-93 was driven by a combination of a drop in total factor productivity (TFP) during 1990-92 and of increases in taxes on labor and consumption and increases in government consumption during 1989-94, which drove down hours worked in Finland. We attempt to endogenize the drop in TFP in variants of the model with an investment sector and with terms-of-trade shocks but are unsuccessful.
Conesa gratefully acknowledges the support of the Barcelona Economics Program of CREA, the Ministerio de Educación y Ciencia under grant SEJ2006-03879, and the Generalitat de Catalunya under grant 2005SGR00447. Kehoe and Ruhl gratefully acknowledge the support of the National Science Foundation under grant SES-0536970. We thank Mark Gibson, John Dalton, and Kevin Wiseman for excellent research assistance. The data and computer programs used in the analysis presented here are available on line at www.greatdepressionsbook.com. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Juan Carlos Conesa & Timothy J. Kehoe & Kim J. Ruhl, 2007. "Modeling great depressions: the depression in Finland in the 1990s," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Nov, pages 16-44. citation courtesy of