Working Paper: CEPR ID: DP13016
Authors: Alberto Caruso; Lucrezia Reichlin; Giovanni Ricco
Abstract: This paper highlights the anomalous characteristics of the Euro Area `twin crises' by contrasting the aggregate macroeconomic dynamics in the period 2009-2013 with the business cycle fluctuations of the previous decades. We report three stylised facts. First, the contraction in output was marked by an anomalous downfall in investment, while consumption, savings and unemployment followed their historical relation with GDP. Second, households' and financial corporations' debts, and house prices deviated from their pre-crisis trends. Third, the jump in the public deficit-GDP ratio in 2008-2009 was unprecedented and so was the fiscal consolidation that followed. Our analysis points to the financial nature of the crisis as a likely explanation for these facts. Importantly, the `anomaly' in public deficit is in large part explained by extraordinary measures in support of the financial sector, which show up in the stock-flow adjustments and reveal a key interaction between the fiscal and the financial sectors.
Keywords: Euro Area; Government Debt; Recessions
JEL Codes: C11; C32; C54; E52; E62; F45
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial crisis (G01) | decline in investment (E22) |
| financial crisis (G01) | deviation of household and financial corporation debts from pre-crisis trends (F65) |
| financial crisis (G01) | deviation of house prices from pre-crisis trends (E30) |
| extraordinary measures taken to support the financial sector (G28) | public deficit anomaly (H62) |