International Debt Deleveraging

Luca Fornaro

Working Papers from Oesterreichische Nationalbank (Austrian Central Bank)

Abstract: I provide a framework for understanding debt deleveraging in a group of _nancially integrated countries. During an episode of international deleveraging world consumption demand is depressed and the world interest rate is low, reecting a high propensity to save. If exchange rates are allowed to oat, deleveraging countries can depreciate their nominal exchange rate to increase production and mitigate the fall in consumption associated with debt reduction. The key insight of the paper is that in a monetary union this channel of adjustment is shut o_, and therefore the falls in consumption demand and in the world interest rate are ampli_ed. Hence, monetary unions are especially prone to hit the zero lower bound on the nominal interest rate and enter a liquidity trap during deleveraging. In a liquidity trap deleveraging gives rise to a union-wide recession, which is particularly severe in high-debt countries. The model suggests several policy interventions that mitigate the negative impact of deleveraging on output in monetary unions.

Keywords: Global Debt Deleveraging; Liquidity Trap; Monetary Union; Precautionary Savings; Debt Deflation (search for similar items in EconPapers)
JEL-codes: E31 E44 E52 F32 F34 F41 G01 G15 (search for similar items in EconPapers)
Pages: 53
Date: 2013-06-10
New Economics Papers: this item is included in nep-mac, nep-mon and nep-opm
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Citations: View citations in EconPapers (15)

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Related works:
Journal Article: International Debt Deleveraging (2018)
Working Paper: International Debt Deleveraging (2016)
Working Paper: International Debt Deleveraging (2015)
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