The Great Financial Crisis in Finland and Sweden
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The Great Financial Crisis in Finland and Sweden

The Nordic Experience of Financial Liberalization

Edited by Lars Jonoug, Jaakko Kiander and Pentti Vartia

The book compares and contrasts the experiences of Finland and Sweden, then adopts an international perspective, encompassing the experiences of Asia, Latin America, Denmark and Norway. Lessons from the 1990s crisis are drawn, and possible solutions prescribed. The conclusion is that long-term effects of financial crises – financial liberalization and integration – are not as dramatic as the short-term effects, but may prove to be of greater importance over time. Only the future will show whether these long-term benefits will balance or even outweigh the enormous short-term costs of the crises.
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Chapter 7: The Boom and Bust Cycle in Norway

Erling Steigum


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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