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.
We thank Pierre Olivier Gourinchas, Nobu Kiyotaki, Fiorella De Fiore, Emi Nakamura, Vania Stavrakeva, Ivan Werning and Philip Lane for their discussions, as well as Mark Aguiar, Olivier Blanchard, Ariel Burstein, Giovanni Dell’Arricia, Gita Gopinath, Gianluca Violante, Caterina Mendicino, Mark Gertler, Virgiliu Midrigan and seminar participants at AEA, NY Fed, NYU, Harvard, Berkeley, Oxford, IMF, Warwick, Maryland, TSE, PSE, Banque de France, CREI, ECB, Warwick, ESSIM-CEPR, the NBER IF and the NBER EFG for their comments. Joseba Martinez provided outstanding research assistance. We thank the Fondation Banque de France for financial support. Philippe Martin is also grateful to the Banque de France Sciences Po partnership for its financial support. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
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