Edmund Phelps (1994) introduced a modified Phillips curve where the natural rate of unemployment is a function of the real interest rate instead of a constant. Koo (2010) argues that the effect of the interest rate on the macro economy is likely to be diluted during a balance sheet recession such as those recently seen in many countries. In the late 1980s, after having deregulated credit and capital movements, Finland experienced a housing boom which subsequently developed into a serious economic crisis similar to the recent ones. To learn from the Finnish experience we estimate the Phelps modified Phillips curve and use a Smooth Transition (STR) model to distinguish between ordinary periods and balance sheet recessions.