Seminario 15/01: O. Arce (Banco de España) – Structural Reforms in a Debt Overhang

Información

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 deleveraging of the private sector and a persistent recession following a negative …nancial shock. In this environment, we show that structural reforms may stimulate output and employment even in the short run, despite their de‡ationary e¤ects. Furthermore, by favoring a faster recovery of investment and collateral values, product market reforms bring forward the end of deleveraging.