International Debt Deleveraging

Luca Fornaro

No 931, Working Papers from Barcelona School of Economics

Abstract: This paper provides a framework to understand debt deleveraging in a group of financially integrated countries. During an episode of international deleveraging, world consumption demand is depressed and the world interest rate is low, reflecting a high propensity to save. If exchange rates are allowed to oat, deleveraging countries can rely on depreciations 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 , because deleveraging countries cannot depreciate against the other countries in the monetary union, and therefore the fall in the demand for consumption and the downward pressure on the interest rate are amplified. As a result, deleveraging in a monetary union can generate a liquidity trap and an aggregate recession.

Keywords: monetary union; Sudden Stops; global debt deleveraging; liquidity trap; precautionay 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)
Date: 2016-10
New Economics Papers: this item is included in nep-mac and nep-opm
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Citations: View citations in EconPapers (8)

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Related works:
Journal Article: International Debt Deleveraging (2018)
Working Paper: International debt deleveraging (2016)
Working Paper: International Debt Deleveraging (2015)
Working Paper: International Debt Deleveraging (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:bge:wpaper:931

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