Abstract
This paper discusses the lessons of the Nordic financial crisis which hit Sweden and Finland in the beginning of the 1990s. The main causes of this exceptionally deep recession were the deregulation of the financial markets in the 1980s and the subsequent overheating, during which the asset prices and debts doubled. The consequences of the bursting of this financial bouble were currency and banking crises, collapsing asset prices, mass unenployment and large fiscal deficits. There are some lessons which can be learnt by analyzing these events, and they are presented in this paper. Among the lessons are the importance of asset prices and wealth effects to the stability of the whole financial system.
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Notes
It was also argued that the social corporatism of small European countries was a good thing (see e.g. Pekkarinen et al. 1992). Similar favourable appraisals of the Nordic economic dynamism appeared also just before the outbreak of the Great Recession of 2009; see e.g., Honkapohja et al. (2009) and Calmfors (2007).
The problems of fixed exchange rates were analyzed in the aftermath of the European currency crisis e.g. by Svensson (1994).
The concept of debt-deflation was originally introduced by Irving Fisher (1933) who tried to explain the Great Depression.
King (1994) discusses this point in more detail. The pre-crisis debt accumulation looks excessive in hindsight and helps to explain the severity of financial hangover. However, without the very high real interest rates (as was the case in Finland, Sweden and the UK) the debt burden might have been manageable.
Such phenomena have been always well-known (see e.g., Kindleberger 1978 and Minsky 1982) although they were neglected by the mainstream economics since they were difficult to understand by using models obsessed with rationality of agents. The global financial crisis of 2008 of course has revived the interest in such things; see Akerlof and Shiller (2009), and Reinhart and Rogoff (2009).
The same happened also in the Great Depression of the 1930s, when the gold standard was first defended as the only viable policy before it was abandoned in many countries in 1931–1933 (see Eichengreen 1992).
This change was connected with the rise of communication technology firms, Ericsson in Sweden and Nokia in Finland.
In Fig. 6 the forecasting errors are shown using a probability graph, where a straight line of observations would indicate that the errors are normally distributed. In the case of larger errors one should use log-percents instead of normal percents because they are better indicators of relative change [see Törnqvist et al. (1985)].
For the Austrian case, see Braumann (2002).
For a review, see Englund and Vihriälä (2009).
It is interesting that in the case of Finland all the major recessions of the last 100 years (1918, 1930, 1976, 1991, 2009) have been followed by a rapid and strong recovery.
See e.g., Maliranta (2009) for an empirical analysis of a Schumpeterian growth process in Finland.
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This paper is based on a presentation held at a conference on the aftermath of the financial crises, at the Austrian National Bank in Vienna, November 2009.
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Kiander, J., Vartia, P. Lessons from the crisis in Finland and Sweden in the 1990s. Empirica 38, 53–69 (2011). https://doi.org/10.1007/s10663-010-9145-0
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DOI: https://doi.org/10.1007/s10663-010-9145-0