Inspecting the Mechanism: Leverage and the Great Recession in the Eurozone
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.
Philippe Martin & Thomas Philippon, 2017. "Inspecting the Mechanism: Leverage and the Great Recession in the Eurozone," American Economic Review, vol 107(7), pages 1904-1937. citation courtesy of