American Economic Review Vol. 107 No. 7 2017

Inspecting the Mechanism: Leverage and the Great Recession in the Eurozone

Philippe Martin¹; Thomas Philippon²

¹ Sciences Po, Department of Economics, 28 Rue des Saints-Peres, Paris 75017, France, and Center for Economic Policy Research (email: ) · ² New York University, Stern School of Business, 44 West Fourth Street, New York, NY 10012, Center for Economic Policy Research, and National Bureau of Economic Research (email: )

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. Macroprudential policies and an early intervention by the central bank to prevent market segmentation and reduce fiscal austerity would also have significantly reduced the recession.

DOI

10.1257/aer.20150630

Volume

107

Issue

7

Pages

1904-1937

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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