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Debt deleveraging and the exchange rate

  • Benigno, Pierpaolo
  • Romei, Federica

Deleveraging from high debt can provoke deep recession with significant international side effects. Swings in the nominal exchange rate and large variations in consumption, output, and terms of trade can happen during the adjustment. All these movements are inefficient and interesting trade-offs emerge from the perspective of global welfare. The optimal adjustment to global imbalances should not necessarily require large movements in the nominal exchange rate. A global liquidity trap can be desirable when countries are more open to trade.

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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 93 (2014)
Issue (Month): 1 ()
Pages: 1-16

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Handle: RePEc:eee:inecon:v:93:y:2014:i:1:p:1-16
DOI: 10.1016/j.jinteco.2014.03.001
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