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Structural reforms in a debt overhang

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  • Andrés, Javier
  • Arce, Óscar
  • Thomas, Carlos

Abstract

The effects of reforms in product and labor markets are assessed in an economy where credit restrictions and long-term debt combine to produce a persistent recession with slow deleveraging following a negative financial shock. We show that product market reforms stimulate output and employment even in the short run, despite their deflationary effects. By favoring a faster recovery of investment and collateral values, such reforms bring forward the end of the deleveraging phase. This channel is missing in the case of labor market reforms, which have more modest effects on economic activity.

Suggested Citation

  • Andrés, Javier & Arce, Óscar & Thomas, Carlos, 2017. "Structural reforms in a debt overhang," Journal of Monetary Economics, Elsevier, vol. 88(C), pages 15-34.
  • Handle: RePEc:eee:moneco:v:88:y:2017:i:c:p:15-34
    DOI: 10.1016/j.jmoneco.2017.05.004
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    Cited by:

    1. Rafael Doménech & Juan Ramón García & Camilo Ulloa, 2016. "The effects of wage flexibility on activity and employment in the Spanish economy," Working Papers 16/17, BBVA Bank, Economic Research Department.
    2. Matteo Cacciatore & Fabio Ghironi & Stephen J. Turnovsky, 2015. "Inflation Targeting and Economic Reforms in New Zealand," International Journal of Central Banking, International Journal of Central Banking, vol. 11(4), pages 145-198, September.
    3. Cacciatore, Matteo & Duval, Romain & Fiori, Giuseppe & Ghironi, Fabio, 2016. "Short-term pain for long-term gain: Market deregulation and monetary policy in small open economies," Journal of International Money and Finance, Elsevier, vol. 68(C), pages 358-385.
    4. Gadatsch, Niklas & Stähler, Nikolai & Weigert, Benjamin, 2016. "German labor market and fiscal reforms 1999–2008: Can they be blamed for intra-euro area imbalances?," Journal of Macroeconomics, Elsevier, vol. 50(C), pages 307-324.
    5. Cacciatore, Matteo & Fiori, Giuseppe & Ghironi, Fabio, 2016. "Market deregulation and optimal monetary policy in a monetary union," Journal of International Economics, Elsevier, vol. 99(C), pages 120-137.
    6. Gadatsch, Niklas & Stähler, Nikolai & Weigert, Benjamin, 2014. "German labor market and fiscal reforms 1999 to 2008: Can they be blamed for intra-Euro Area imbalances?," Working Papers 05/2014, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung.
    7. repec:wsi:jicepx:v:08:y:2017:i:01:n:s1793993317500028 is not listed on IDEAS
    8. repec:eee:jpolmo:v:40:y:2018:i:6:p:1200-1220 is not listed on IDEAS
    9. Masuch, Klaus & Anderton, Robert & Setzer, Ralph & Benalal, Nicholai, 2018. "Structural policies in the euro area," Occasional Paper Series 210, European Central Bank.
    10. Sandra Gomes, 2014. "Structural reforms in the euro area," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    11. Cacciatore, Matteo & Duval, Romain & Fiori, Giuseppe & Ghironi, Fabio, 2016. "Market reforms in the time of imbalance," Journal of Economic Dynamics and Control, Elsevier, vol. 72(C), pages 69-93.
    12. repec:eee:poleco:v:48:y:2017:i:c:p:74-90 is not listed on IDEAS
    13. Aida Caldera Sánchez & Alain de Serres & Naomitsu Yashiro, 2016. "Reforming in a difficult macroeconomic context: A review of the issues and recent literature," OECD Economics Department Working Papers 1297, OECD Publishing.
    14. Borio, Claudio & Gambacorta, Leonardo, 2017. "Monetary policy and bank lending in a low interest rate environment: Diminishing effectiveness?," Journal of Macroeconomics, Elsevier, vol. 54(PB), pages 217-231.
    15. Stefano Neri & Alessandro Notarpietro, 2014. "Inflation, debt and the zero lower bound," Questioni di Economia e Finanza (Occasional Papers) 242, Bank of Italy, Economic Research and International Relations Area.
    16. Óscar Arce & Samuel Hurtado & Carlos Thomas, 2016. "Policy Spillovers and Synergies in a Monetary Union," International Journal of Central Banking, International Journal of Central Banking, vol. 12(3), pages 219-277, September.
    17. repec:eee:jmacro:v:55:y:2018:i:c:p:28-45 is not listed on IDEAS
    18. Stefano Neri & Alessandro Notarpietro, 2015. "The macroeconomic effects of low and falling inflation at the zero lower bound," Temi di discussione (Economic working papers) 1040, Bank of Italy, Economic Research and International Relations Area.
    19. Vogel, Lukas, 2017. "Structural reforms at the zero bound," European Journal of Political Economy, Elsevier, vol. 48(C), pages 74-90.
    20. repec:eee:finsta:v:38:y:2018:i:c:p:72-80 is not listed on IDEAS

    More about this item

    Keywords

    Deleveraging; Collateral constraints; Long-run debt; Structural reforms;

    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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