The Nordic Experience of Financial Liberalization
Edited by Lars Jonoug, Jaakko Kiander and Pentti Vartia
Chapter 6: The Boom and Bust Cycle in Finland and Sweden in an International Perspective
Lars Jonung, Ludger Schuknecht and Mika Tujula INTRODUCTION1 Finland and Sweden experienced an intense boom in the late 1980s, followed by a sharp contraction in the early 1990s and an exceptionally long recovery roughly until the turn of the century. The intensity of this boom– bust cycle is unique in the economic history of the two countries – but it is not unique in an international context. Actually, a pattern of boom– bust is common to many countries in recent decades and, in this respect, Finland and Sweden are no exception. What is exceptional is that two such advanced welfare states as Finland and Sweden with a tradition of full employment and well-developed social systems could end up in such a deep financial crisis with an unprecedented decline in real output, a dramatic rise in unemployment and huge government deficits. The banking and currency crisis of the 1990s turned out to be one of the most severe ever to occur in these two Nordic countries – in some aspects the worst on record.2 For policy-makers, economists and the public the magnitude of the boom and bust of the 1990s came as a surprise.3 The common view was that ‘it couldn’t happen here’. After the crisis, however, a large volume of research has dealt with various aspects of the boom–bust cycle: its effects on the financial system, on the fiscal stance and balances and on the real economy, and the role of economic policies in inducing and alleviating the crisis. As a...
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