BICEPS/SSE Riga Research Seminar: Can large trade shocks cause crises? The case of the Soviet-Finnish trade collapse

Abstract: We study macroeconomic consequences of a major trade disruption using the example of the FinnishSoviet trade collapse in 1991. This is a rare case of a well-identified large trade shock in a developed economy. We find that the shock had a significant effect on Finnish output. While the direct trade channel effect was rather moderate, the shock led to significant tightening of financial conditions. It was therefore endogenously amplified due to the propagation through the domestic financial sector. Even so, the trade collapse was insufficient to generate an all-out economic crisis. It can account for only a part of the Finnish Great Depression (1990 - 1993). The crisis was triggered and prolonged by the meltdown of the overheated financial and banking sectors since 1989. We show that the financial system remaineda major independent source of shocks throughout the depression. 

Adam Gulan is senior adviser at the Bank of Finland's Monetary Policy and Research Department. He graduated from Rutgers University in 2011. Prior to his PhD studies he also worked at the National Bank of Poland. His research interests include, broadly, macroeconomics, international finance, applied econometrics and economic history. He has been recently working on business cycle fluctuations and financial frictions in open economies. He has taught macroeconomics at the Finnish Doctoral Program in Economics.