Modeling Great Depressions: The Depression in Finland in the 1990s

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Money Macro Seminar
University of Pennsylvania

3718 Locust Walk
309 McNeil

Philadelphia, PA

United States

Joint with: Juan Carlos Conesa and Kim J. Ruhl

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.

For more information, contact Harold Cole.

Timothy J. Kehoe

University of Minnesota

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