The Nordic Experience of Financial Liberalization
Edited by Lars Jonoug, Jaakko Kiander and Pentti Vartia
Chapter 7: The Boom and Bust Cycle in Norway
Erling Steigum INTRODUCTION1 The Norwegian 1991–92 banking crisis was a dramatic manifestation that something had gone terribly wrong after the financial deregulation in the mid-1980s. With as short a time lag, Finland and Sweden experienced similar boom–bust cycles, banking crises and speculative attacks following their financial deregulations in the 1980s. Shortly after the crises in Finland, Norway and Sweden, several emerging market economies have been hit by financial crises involving speculative attacks on fixed (pegged) exchange rates and depressions in the wake of financial liberalization and lending booms, for example in Mexico, East Asia and Argentina.2 The recent financial crisis which originated in the United States shows that even advanced market economies are not immune to the destructing forces of boom–bust cycles and financial crises. Lending booms triggered by financial deregulation do not have to end in a crisis, however. On the contrary, cross-country studies suggest that although a lending boom typically follows financial liberalization, most lending booms end with a ‘soft landing’ and no financial crisis; see for example Gourinchas et al. (2001). Therefore, an important question is why did financial deregulation in Finland, Norway and Sweden end in systemic banking crises? This chapter reviews the Norwegian boom and bust cycle and 1991–92 banking crisis. The Norwegian experience was quite similar to what happened in Finland and Sweden shortly afterwards; see Englund (1999), and Chapters 2 and 3. There are interesting differences though. Most noteworthily, the economic crisis in Norway was not as severe as...
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