Structural Reforms and Capital Market Interventions during a Financial Crisis

I study how structural reforms in product and labor markets affect an economy that is going through a financial crisis. Of specific interest is the role of credit intermediation in a crisis and how it is influenced by reforms. I consider three key characteristics of the recent financial crisis that are potentially relevant for policy analysis: First, the crisis was triggered in the financial sector; second, there were spillovers from the financial to the real sector due to credit rationing; third, governments actively intervened in the credit market during the crisis. I construct two dynamic general equilibrium models with financial frictions to address these issues --a closed economy model and a monetary union model. I show that permanent structural reforms have positive effects on aggregate output in both the long and the short run. They affect the capital market positively and stimulate credit intermediation. Contrariwise, reforms that are either implemented temporarily or announced to be implemented in the future have negative consequences for output in the short run. Moreover, reforms that are implemented in one country of a currency union have positive short-run effects on both the reforming country and its foreign counterpart. My results also hold if the central bank is constrained by a lower interest rate bound. I also show that reforms have a qualitatively similar impact as a direct intervention in the credit market. Moreover, credit market interventions are complementary to structural reforms.


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