Such “reduced form” evidence can be observationally equivalent to the evidence that could result from an unchanged structural relationship in an economy where the central bank has been successful in reducing inflation and output volatility, which would correspondingly reduce or could even eliminate the empirical correlation between inflation and the output gap.
The outbreak of the crisis substantially increased risk aversion: the weaknesses of these countries were exposed; in an environment of already weak growth, investors turned away, sovereign spreads started to rise. Soon, the solvency of the governments of these countries was questioned, and with it the solvency of the financial institutions located there.