Working Paper: CEPR ID: DP13522
Authors: Giancarlo Corsetti; Barry Eichengreen; Galina B. Hale; Eric Tallmann
Abstract: Why was recovery from the euro area crisis delayed for a decade? The explanation lies in the absence of credible and timely policies to backstop financial intermediaries and sovereign debt markets. In this paper we add light and color to this analysis, contrasting recent experience with the 1992-3 crisis in the European Monetary System, when national central banks and treasuries more successfully provided this backstop. In the more recent episode, the incomplete development of the euro area constrained the ability of the ECB and other European institutions to do likewise.
Keywords: financial crises; sovereign and banking risk; backstop; currency devaluation
JEL Codes: E63; F45; G01; N14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| absence of credible and timely policies to backstop financial intermediaries and sovereign debt markets (F65) | delay in recovery from the euro area crisis (O52) |
| successful backstopping by national central banks and treasuries during the EMS crisis (E58) | prevention of liquidity squeeze (E44) |
| successful backstopping by national central banks and treasuries during the EMS crisis (E58) | continuation of economic activity (E20) |
| lack of backstopping in the euro crisis (F65) | binding credit constraint that hampered investment and demand (F65) |
| incomplete development of euro area institutions (F36) | constrained ECB's ability to act decisively (E58) |
| constrained ECB's ability to act decisively (E58) | exacerbation of economic downturn (F44) |
| negative feedback loop between banks and sovereign debt markets (F65) | prolonging of the euro crisis (H12) |