Structural Reforms in a Debt Overhang

47 Pages Posted: 30 Jul 2014

See all articles by Javier Andrés

Javier Andrés

University of Valencia - Department of Economics

Oscar Arce

Banco de España

Carlos Thomas

Banco de España

Date Written: July 29, 2014

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 deflationary 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.

Keywords: deleveraging, collateral constraints, long-run debt, structural reforms

JEL Classification: E43, E44, E65, G21

Suggested Citation

Andrés, Javier and Arce, Oscar and Thomas, Carlos, Structural Reforms in a Debt Overhang (July 29, 2014). Banco de Espana Working Paper No. 1421. Available at SSRN: https://ssrn.com/abstract=2473479 or http://dx.doi.org/10.2139/ssrn.2473479

Javier Andrés (Contact Author)

University of Valencia - Department of Economics ( email )

E-46022 Valencia, Valencia E-46022
Spain
(34 96) 382 8260 (Phone)
(34 96) 382 8249 (Fax)

Oscar Arce

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Carlos Thomas

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

HOME PAGE: http://www.bde.es

Register to save articles to
your library

Register

Paper statistics

Downloads
71
Abstract Views
1,066
rank
322,485
PlumX Metrics