Debt Deleveraging and The Exchange Rate

Pierpaolo Benigno and Federica Romei

No 17944, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Deleveraging from high debt can provoke deep recession with significant international side effects. The exchange rate of the deleveraging country will depreciate in the short run and appreciate in the long run. The real interest rate will fall by more than in the rest of the world. Bounds and policies that constrain the adjustment can prolong and deepen the recession. Early exit strategies from accommodating monetary policy can be quite harmful, as can such other policies as keeping interest rates too high during the deleveraging period. The analysis also applies to a monetary union facing internal adjustment of current account imbalances.

JEL-codes: E52 F32 F41 (search for similar items in EconPapers)
Date: 2012-03
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-opm
Note: EFG IFM ME
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Citations: View citations in EconPapers (25)

Published as “Debt Deleveraging and The Exchange Rate,” Journal of International Economics, 93, 1-16, (2014). (with F. Romei)

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Related works:
Journal Article: Debt deleveraging and the exchange rate (2014)
Working Paper: Debt Deleveraging and the Exchange Rate (2012)
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