Determinants of macroeconomic resilience in the euro area: An empirical assessment of national policy levers

This paper evaluates which structural characteristics matter for macroeconomic resilience, in particular regarding the capacity to absorb and recover from common shocks across euro area Member States over the period from 1998 to 2018. Applying a panel regression analysis and Bayesian model averaging, the paper aims to identify a set of factors as diverse and specific as possible in order to guide future policy actions. These country-specific factors relate to the macroeconomic conditions, the functioning of product, labour and financial markets, institutional quality and to deeply entrenched structural factors. The empirical analysis suggests that the factors conditioning the shock absorption across euro area Member States largely differ from those facilitating recovery in the face of a common shock. More specifically, labour market features play an important role in shock absorption with higher levels of labour market rigidity dampening the shock absorption capacity most. The recovery capacity is affected by a broader set of factors, especially those that hinder the reallocation of labour as well as of the production of goods and services. While high public debt seems to hinder shock absorption capacity, high private debt weakens the recovery capacity. Some factors such as high economic openness have a negative impact on the absorption capacity in case of a common shock as it also affects trading partners, while having a positive impact on the recovery capacity. The results also suggest that degrees of macroeconomic resilience differ across the euro area and well-calibrated reforms are needed to address the nexus of country-specific challenges.