Financial Instability and Banking Crises in a small open economy

The present paper seeks to investigate the importance of financial instability during four banking crises, with focus on the small open economy of Norway. The crises elaborated on are the Post First world war crisis of the early 1920s, the mid 1920s Monetary crisis, the Great Depression of the 1930s and the Scandinavian banking crisis of 1987-1993. The paper firstly offers a brief description of the financial instability hypothesis as applied by Minsky, Kindleberger, and in a new explicit dynamic financial crisis model. Financial instability creation basically happens in times of overheating, overspending and over lending, i.e., during significant booms, and have devastating effects after markets have turned into a state of crises. Thereafter, the paper tests the validity of the financial instability hypothesis by using a quantitative structural time series model. The test reveals upheaval of financial and macroeconomic indicators prior to the crises, making the economy overheat and create asset bubbles due to huge growth in debt. These conditions caused the following banking crises. Finally, the four crises are discussed qualitatively. The conclusion is that significant increase in money supply and debt caused overheating, asset bubbles and finally financial and banking crises which spread to the real economy

Offshore Industries as Growth Sector: The Norwegian Case

Writers on Norwegian economic history often claim that marine and maritime industries, i.e., the offshore sector, played a major role for value creation in the Norwegian economy for centuries. However, little has been done to quantify the sector’s contribution to the economy. The present paper seeks to quantify the size of the key offshore industries compared to GDP and exports. To do so it has been necessary to draw on new historical national account calculations in addition to compute several new series. Based on these calculations we find that the offshore sector made up a significant and important part of Norwegian GDP, and a dominant part of exports, 1816-2021. The key offshore industries were first fishing, thereafter ocean transport, and finally petroleum extraction. The sector’s overall size of the Norwegian economy has been quite stable in a long-term perspective, but with an increasing GDP share after the takeoff of oil and gas extraction from the continental shelf in the 1970s

Public finances, governance control and economic growth: a macroeconomic history approach

The size of the public sector is an important tool in public governance. Public sector size may fuel both economic growth and political influence over the economy. By compiling and processing data from different sources of public accounts the paper aims at mapping the development of key financial indicators for the Norwegian central government sector during the transition period from the mid 19th to the mid 20th century. The data enable us to give measures of the size of the public sector alone and compared to the overall economy. It is found that the sector started its continuous growth before politicians deliberately started to increase the sector’s size of the total economy. The paper also finds that an increase of the public sector often, but not always, reflects political economy regimes. Persistent growth in public finances as a tool for economic policy making did not take place before the introduction of the social-democratic regime in 1935. The paper also concludes that economic growth started before the growth in the public sector, suggesting that public sector growth might as well be a result of economic growth or vice versa

Do prices reflect short-term output fluctuations? : empirical evidence from a small open raw material based economy

Within the framework of Keynesian economic theory it is widely taken for granted that short term output fluctuations are mirrored in corresponding fluctuations in prices. By examining data on prices and output for a small open raw material based economy, in this case Norway, 1830-2006, this paper concludes that there isn't a clear positive correlation between prices and output. Contrary, there is more evidence of a counter-cyclical relationship, indicating that business cycles are more frequently caused by supply-side shocks than demand side shocks. However, negative demand shocks normally seem to cause lagged negative price responses

Convergence between the Baltic and the Nordic economies: Some reflections based on new data for the Baltic countries

This short paper uses recent estimates of GDP per capita for the Baltic countries for the 1919-2020(22) period to test for convergence between the Baltic and the Nordic economies. Drawing from the methodology used in Bernard and Durlauf (1996) and Greasley and Oxley (1997), we utilise a time-series approach to test for bivariate convergence between the various Baltic and Nordic economies. We find some evidence of conditional convergence and catching up for the interwar period, 1919-1939 and the post-Soviet era 1993-2022, when for the communist growth period until 1988 we find no trace of convergence, when thereafter during the last years of communism, the Baltic economies went into a severe and devastating recession

Ethics, resource rent, environment and petroleum policy: the case of a small open economy

This paper contributes to the understanding of how the environment, ethics, values, and historical contingencies shape public policy. It explains the accomplishment of petroleum resource management in the small open economy of Norway. The study is conducted by mapping policy decisions and the arguments behind them regarding environmental and ethical issues. This is done by studying available governmental and parliamentary papers along with statements from politicians and central governmental officials. The paper also seeks to illuminate some of the decisions by quantitative measures. The paper firstly describes a model of Ricardian resource rent. Secondly, it investigates the set of values that were in place before the petroleum production started in the 1970s, as described in public documents. An important argument was to build a “qualitatively better society” for the benefit of the people. Thirdly, it traces the historical roots of these values by examining historical sources. The main findings are that success lies in understanding the ethics behind the environmental resource rent harvesting of this non-renewable natural resource. The paper concludes that the focus on the natural environment and resource rent management can be attributed to popular values built on historical traditions. According to them, the state and the trust between the state and its citizens played key roles in shaping the policy. The careful policy can be illustrated by the fact that Norway has managed to build one of the largest sovereign funds in the world worth USD 1,200 billion for use by future generations. Only 3% of its value, significantly less than its historical net profit, should be used annually.publishedVersio

A Long Term View on the Short Term Co-movement of Output and Prices in a Small Open Economy

-One assumption behind inflation targeting as objective for monetary policy is that inflation rates in the short run to some extent reflect output cycles. The present paper investigates the historical co-movements of output and prices for a small open raw material based economy, in this case Norway 1830 – 2006. Looking at contemporaneous movements we find more often negative correlations between the two variables than positive. The correlations do not give any evidence of causality. However, they may indicate that supply side shocks, often caused by the foreign sector, were more important for historical output cycles in Norway than assumed hithert

Why was the Great Depression not so great in the Nordic countries? : economic policy and unemployment

The present paper seeks to examine why the Nordic countries performed better than most other Western countries during the 1930s, when they at the same time experienced high unemployment levels. The conclusions drawn here are that the early abandonment of gold and the adoption of a more inflationary monetary policy serve as the key explanation to the relatively mild Nordic depression and the rapid recovery. However, the paradox of persistently high unemployment remains. By international comparisons the paper shows that these rather can be explained by a positive shift in labour supply than the scale of the depression. The analysis in the paper also reveals that Sweden performed more like continental Europe in respect of both the depression and the labour market

What money can buy? : three centuries of Norwegian wage and price development

On the basis of newly utilized data from one of the largest manual historical archives on wages and prices internationally and unpublished data from Statistics Norway this article offers new wage and price series for Norway 1726-2006, which enable us to calculate real wages. These cover all main industries and sub-industries as well as an aggregated series for the entire economy. We conclude that long run real wages stayed fairly stable until the 1820s. Thereafter a modest increase took place until the 1870s, followed by rapid growth. Thus, the development of real wages seems to follow the pattern of modernization of the Norwegian economy

Growth in public finances as tool for control : Norwegian development 1850-1950

By drawing on information from public accounts from the nineteenth and twentieth century the present paper aims at mapping the development of key financial indicators for the Norwegian central government sector. It concludes that growth in the size of this sector often, but clearly not always, reflects political economy regimes. The paper concludes that persistant growth in public finances as tool for control over the economy did not take place before the introduction of the social-democratic regime in 1935