First, we should seek measures to ensure a soft-landing of the household debt problem, by cooperating closely with the government and the regulatory authorities. Liquidity and fund flows through open market operations should be properly managed, to prevent companies from suffering having financing difficulties in the processes of restructuring.
Uhlig tackles these issues in the setting of a currency union, taking into account many of the additional aspects that complicate the situation we face now. In his model, membership in a monetary union and the resulting prospect of financial assistance to counter the risks of contagion can extend a country’s borrowing constraint and weaken the incentive to consolidate.