International debt deleveraging

Luca Fornaro

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

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 float, 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 off, 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 ampliflied. As a result, deleveraging in a monetary union can generate a liquidity trap and an aggregate recession.

Keywords: Global Debt Deleveraging; Sudden Stops; 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)
Date: 2012-11, Revised 2016-09
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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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:upf:upfgen:1401

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