Financial Frictions and Stabilization Policies
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de Blas, Beatriz and Malmierca, María, Financial Frictions and Stabilization Policies (May 14, 2019). Available at SSRN: https://ssrn.com/abstract=3388131
After the financial crisis of 2007, in most economies carrying out either fiscal consolidations or counter-cyclical fiscal policies, public and private debt have moved in opposite directions, as opposed to pre-2007 evidence. Private deleverage and public debt build-up may affect the recovery path of countries after a recession. In a new Keynesian model with financial frictions, we show that when the economy is hit by a credit risk shock, the negative correlation that arises between public and pr ...