Inspecting the Mechanism: Leverage and the Great Recession in the Eurozone
Abstract
We provide a comprehensive account of the dynamics of eurozone countries from 2000 to 2012.
We analyze private leverage, fiscal policy, labor costs and spreads, and we propose a model
and an identification strategy to separate the impact of credit cycles, excessive government
spending, and sudden stops. We then ask how periphery countries would have fared with
different policies. We find that countries could have stabilized their employment if they had
followed more conservative fiscal policies during the boom. Macro-prudential policies and an
early intervention by the central bank to prevent market segmentation and reduce fiscal austerity
would also have significantly reduced the recession.
Domains
Economics and Finance
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