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Financial and fiscal interaction in the euro area crisis: this time was different

Author

Listed:
  • Alberto Caruso
  • Lucrezia Reichlin

    (London Business School)

  • Giovanni Ricco

    (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)

Abstract
This paper highlights the anomalous characteristics of the Euro Area ‘twin crises' by contrasting the aggregate macroeconomic 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 precrisis 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 key interaction between the fiscal and the financial sectors.

Suggested Citation

  • Alberto Caruso & Lucrezia Reichlin & Giovanni Ricco, 2019. "Financial and fiscal interaction in the euro area crisis: this time was different," Working Papers hal-03403269, HAL.
    • Handle: RePEc:hal:wpaper:hal-03403269
    Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-03403269
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    5. Jollès, Maya & Meyermans, Eric & Vašíček, Bořek, 2023. "Determinants of macroeconomic resilience in the euro area: An empirical assessment of national policy levers," Economic Systems, Elsevier, vol. 47(3).
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    More about this item

    Keywords

    Euro area; Government debt; Financial crisis; Business cycles;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions

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