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Deleveraging, deflation and depreciation in the euro area

Dmitry Kuvshinov, Gernot Müller and Martin Wolf

No 11015, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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: currency union; deflationary spillovers; deleveraging; downward wage rigidity; paradox of flexibility; real exchange rate; zero lower bound (search for similar items in EconPapers)
JEL-codes: E42 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec, nep-mac, nep-mon and nep-opm
Date: 2015-12
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Journal Article: Deleveraging, deflation and depreciation in the euro area (2016) Downloads
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