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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;Working Papers Homepage.
  • Handle: RePEc:bde:wpaper:1421
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    Cited by:

    1. 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.
    2. repec:eee:finsta:v:38:y:2018:i:c:p:72-80 is not listed on IDEAS
    3. 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.
    4. 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.
    5. Vogel, Lukas, 2017. "Structural reforms at the zero bound," European Journal of Political Economy, Elsevier, vol. 48(C), pages 74-90.
    6. 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.
    7. 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.
    8. 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.
    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. "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.
    12. 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.
    13. 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.
    14. repec:eee:jmacro:v:55:y:2018:i:c:p:28-45 is not listed on IDEAS
    15. 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.
    16. repec:wsi:jicepx:v:08:y:2017:i:01:n:s1793993317500028 is not listed on IDEAS
    17. repec:eee:jmacro:v:54:y:2017:i:pb:p:217-231 is not listed on IDEAS
    18. 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.
    19. repec:eee:jpolmo:v:40:y:2018:i:6:p:1200-1220 is not listed on IDEAS
    20. 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.

    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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