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Structural reforms in a debt overhang

Author

Listed:
  • Javier Andrés

    (University of Valencia)

  • Óscar Arce

    (Banco de España)

  • Carlos Thomas

    (Banco de España)

Abstract

We assess the effects of reforms in product and labor markets in a model economy featuring credit restrictions and pre-existing long-term debt. Both elements, which are core features of the current scenario faced by some euro area countries, combine to produce a slow and protracted deleveraging of the private sector and a persistent recession following a negative financial shock. In this environment, we show that product and labor market reforms may stimulate output and employment even in the short run, despite their defl ationary effects. Furthermore, by favoring a faster recovery of investment and collateral values, product market reforms bring forward the end of deleveraging and the exit from recession.

Suggested Citation

  • Javier Andrés & Óscar Arce & Carlos Thomas, 2014. "Structural reforms in a debt overhang," Working Papers 1421, Banco de España.
    • Handle: RePEc:bde:wpaper:1421
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    More about this item

    Keywords

    deleveraging; collateral constraints; long-run debt; structural reforms;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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