Inspecting the Mechanism: Leverage and the Great Recession in the Eurozone

56 Pages Posted: 14 Oct 2014 Last revised: 18 Sep 2021

See all articles by Philippe Martin

Philippe Martin

Sciences Po

Thomas Philippon

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: October 2014

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.

Suggested Citation

Martin, Philippe and Philippon, Thomas, Inspecting the Mechanism: Leverage and the Great Recession in the Eurozone (October 2014). Available at SSRN: https://ssrn.com/abstract=2510069

Philippe Martin (Contact Author)

Sciences Po ( email )

27 rue Saint-Guillaume
Paris Cedex 07, 75337
France

Thomas Philippon

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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