Financial and fiscal interaction in the Euro Area crisis: This time was different

Alberto Caruso, Lucrezia Reichlin and Giovanni Ricco ()

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Abstract: This paper highlights the anomalous characteristics of the Euro Area ‘twin crises' by contrasting the aggregate macroecosnomic dynamics in the period 2009–2013 with the business cycle fluctuations of the previous decades. We report three novel stylised facts. First, the contraction in output was marked by an anomalous downfall in private investment and an increase in households' savings, while consumption and unemployment followed their historical relation with GDP. Second, households' and financial corporations' debts, and house prices deviated from their pre-crisis trends, while non-financial corporations' debt followed historical regularities. Third, the jumps in the public deficit-GDP and debt-GDP ratios in 2008–2009 were unprecedented and so was the fiscal consolidation that followed. Our analysis points to the financial nature of the crisis as a likely explanation for these facts. Importantly, the ‘anomalous' increase in public debt is in large part explained by extraordinary measures in support of the financial sector, which show up in the stock-flow adjustments and reveal a keyinteraction between the fiscal and the financial sectors.

Keywords: Euro Area; Government debt; Recessions; Financial crises; Business cycles (search for similar items in EconPapers)
Date: 2019-10
Note: View the original document on HAL open archive server: https://hal-sciencespo.archives-ouvertes.fr/hal-03403613
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Published in European Economic Review, 2019, 119, pp.333 - 355. ⟨10.1016/j.euroecorev.2019.08.002⟩

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Related works:
Journal Article: Financial and fiscal interaction in the Euro Area crisis: This time was different (2019)
Working Paper: Financial and fiscal interaction in the euro area crisis: this time was different (2019)
Working Paper: Financial and fiscal interaction in the Euro Area crisis: This time was different (2019)
Working Paper: Financial and fiscal interaction in the euro area crisis: this time was different (2019)
Working Paper: Financial and fiscal interaction in the euro area crisis: this time was different (2019)
Working Paper: Financial and Fiscal Interaction in the Euro Area Crisis: This Time was Different (2018)
Working Paper: Financial and Fiscal Interaction in the Euro Area Crisis: This Time was Different (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:spmain:hal-03403613

DOI: 10.1016/j.euroecorev.2019.08.002

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