Financial Factors In The Boom-Bust Episode In Finland In The Late 1980s And Early 1990s

This paper proposes a framework for studying the boom and bust in Finland in the late 1980s and early 1990s. The authors develop a small open economy DSGE model with balance sheet-constrained firms à la BGG and calibrate it to the Finnish economy. They use the model to simulate three events that are claimed to have played a key role in the Finnish boom-bust episode and compare the model outcome with actual Finnish data. Firstly, they assess in the DSGE framework the role of financial market deregulation in the 1980s in the boom that preceded the crises. Secondly, they use the model to evaluate the negative impact of the collapse of Soviet-Finnish trade at the beginning of 1991.