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RESEARCH PRODUCT
When fiscal consolidation meets private deleveraging
Javier AndrésDominik ThalerOscar ArceCarlos Thomassubject
MacroeconomicsEconomics and EconometricsCollateralmedia_common.quotation_subject05 social sciencesSmall open economy1. No povertyMonetary economicsConsolidation (business)Debt8. Economic growth0502 economics and businessEconomics050207 economicsDeleveraging050205 econometrics media_commondescription
Abstract Inspired by the recent experience in some euro area countries, we analyze the interaction between fiscal consolidation and private deleveraging in a model of a small open economy in a monetary union. The coexistence of long-term private debt and collateral constraints on new loans implies that, following an adverse financial shock, the economy enters a slow private deleveraging process, the duration of which is endogenous to collateral and debt dynamics. In this context, large and/or front-loaded consolidations increase the length and depth of private deleveraging, causing higher relative output losses over the medium run. As a result, such aggressive consolidation strategies entail larger present-value multipliers. Our results thus speak in favor of ‘deleveraging-friendly’ (smaller/more gradual) consolidations.
| year | journal | country | edition | language |
|---|---|---|---|---|
| 2020-07-01 | Review of Economic Dynamics |