Working Paper: NBER ID: w20572
Authors: Philippe Martin; Thomas Philippon
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 interest rates and we propose a strategy to separate the impact of credit cycles, excessive government spending, and sudden stops. We then ask how eurozone countries would have fared with different policies. We find that most 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 would also have significantly reduced the recession.
Keywords: Eurozone; Great Recession; Private Leverage; Fiscal Policy; Counterfactual Experiments
JEL Codes: E2; E3; E4; E6; F3; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| eurozone countries adopting more conservative fiscal policies during the boom (E62) | stabilization of employment (J68) |
| more conservative fiscal policies (E62) | lower spreads (G19) |
| lower spreads (G19) | reduced necessity for fiscal austerity during downturns (E62) |
| implementing macroprudential policies to limit private debt growth (F65) | stabilization of private demand and employment (E63) |
| stabilization of private demand and employment (E63) | decreased need for bank recapitalization (G28) |
| earlier intervention by the European Central Bank (E52) | mitigated risk of a eurozone breakup (F36) |
| mitigated risk of a eurozone breakup (F36) | enabled periphery countries to stabilize employment post-2010 (F69) |
| fiscal devaluation in 2009 (H69) | boom in exports (F10) |
| boom in exports (F10) | shorter recession (E65) |
| shorter recession (E65) | lower public debt by 2012 (H69) |