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Structural reforms in a debt overhang

Javier Andrés (), Oscar Arce () and Carlos Thomas ()

Journal of Monetary Economics, 2017, vol. 88, issue C, 15-34

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.

Keywords: Deleveraging; Collateral constraints; Long-run debt; Structural reforms, (search for similar items in EconPapers)
Date: 2017
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Working Paper: Structural reforms in a debt overhang (2014) Downloads
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Handle: RePEc:eee:moneco:v:88:y:2017:i:c:p:15-34