Deleveraging, deflation and depreciation in the euro area

Dmitry Kuvshinov, Gernot Müller and Martin Wolf

European Economic Review, 2016, vol. 88, issue C, 42-66

Abstract: During the post-crisis period, economic performance has been highly heterogenous across the euro area. While some economies rebounded quickly after the 2009 output collapse, others are undergoing a protracted further decline as part of an extensive deleveraging process. At the same time, inflation has been subdued throughout the whole of the euro area and intra-euro-area exchange rates have hardly moved. We interpret these facts through the lens of a two-country model of a currency union. We find that deleveraging in one country generates deflationary spillovers which cannot be contained by monetary policy, as it becomes constrained by the zero lower bound. As a result, the real exchange rate response becomes muted, and the output collapse—concentrated in the deleveraging economies.

Keywords: Deleveraging; Currency union; Real exchange rate; Zero lower bound; Deflationary spillovers (search for similar items in EconPapers)
JEL-codes: E42 F41 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Working Paper: Deleveraging, deflation and depreciation in the euro area (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:88:y:2016:i:c:p:42-66

DOI: 10.1016/j.euroecorev.2016.02.018

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