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Debt deleveraging and the exchange rate

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  • Benigno, Pierpaolo
  • Romei, Federica

Abstract

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.

Suggested Citation

  • Benigno, Pierpaolo & Romei, Federica, 2014. "Debt deleveraging and the exchange rate," Journal of International Economics, Elsevier, vol. 93(1), pages 1-16.
  • 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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    Cited by:

    1. George Economides & Apostolis Philippopoulos & Petros Varthalitis, 2016. "Monetary Union, Even Higher Integration, or Back to National Currencies?," CESifo Economic Studies, CESifo, vol. 62(2), pages 232-255.
    2. Romei, Federica, 2015. "Need for (the Right) Speed: the Timing and Composition of Public Debt Deleveraging," Economics Working Papers MWP2015/11, European University Institute.
    3. Caballero, Ricardo & Farhi, Emmanuel & Gourinchas, Pierre-Olivier, 2015. "Global Imbalances and Currency Wars at the ZLB," CEPR Discussion Papers 10905, C.E.P.R. Discussion Papers.
    4. Cook, David & Devereux, Michael B, 2016. "Exchange rate flexibility under the zero lower bound," Journal of International Economics, Elsevier, pages 52-69.
    5. Engel, Charles, 2016. "International coordination of central bank policy," Journal of International Money and Finance, Elsevier, vol. 67(C), pages 13-24.
    6. Luca Fornaro, 2012. "International debt deleveraging," Economics Working Papers 1401, Department of Economics and Business, Universitat Pompeu Fabra, revised Sep 2016.
    7. Cook, David & Devereux, Michael B, 2016. "Exchange rate flexibility under the zero lower bound," Journal of International Economics, Elsevier, pages 52-69.
    8. repec:eee:dyncon:v:83:y:2017:i:c:p:55-106 is not listed on IDEAS
    9. Gauti Eggertsson & Federica Romei & Pierpaolo Benigno, 2015. "Dynamic Debt Deleveraging and Optimal Monetary Policy," 2015 Meeting Papers 390, Society for Economic Dynamics.
    10. Bussirère, Matthieu & Lopez, Claude & Tille, Cédric, 2013. "Currency Crises in Reverse: Do Large Real Exchange Rate Appreciations Matter for Growth?," MPRA Paper 44053, University Library of Munich, Germany.
    11. Philippopoulos, Apostolis & Varthalitis, Petros & Vassilatos, Vanghelis, 2017. "Fiscal consolidation and its cross-country effects," Journal of Economic Dynamics and Control, Elsevier, vol. 83(C), pages 55-106.
    12. Luca Fornaro, 2017. "Aggregate Demand Externalities in a Global Liquidity Trap," 2017 Meeting Papers 139, Society for Economic Dynamics.
    13. Pierpaolo Benigno & Gauti B. Eggertsson & Federica Romei, 2014. "Dynamic Debt Deleveraging and Optimal Monetary Policy," NBER Working Papers 20556, National Bureau of Economic Research, Inc.
    14. Kuvshinov, Dmitry & Müller, Gernot J. & Wolf, Martin, 2016. "Deleveraging, deflation and depreciation in the euro area," European Economic Review, Elsevier, vol. 88(C), pages 42-66.
    15. Michael Curran & Adnan Velic, 2016. "Real Exchange Rate Persistence and Country Characteristics," Villanova School of Business Department of Economics and Statistics Working Paper Series 31, Villanova School of Business Department of Economics and Statistics.
    16. Matthieu Bussière & Claude Lopez & Cédric Tille, 2015. "Do real exchange rate appreciations matter for growth?," Economic Policy, CEPR;CES;MSH, vol. 30(81), pages 5-45.
    17. Paul Luk & David Vines, 2014. "Debt Deleveraging and the Zero Bound: Potentially Perverse Effects of Real Exchange Rate Movements," Working Papers 202014, Hong Kong Institute for Monetary Research.
    18. Sergio de Ferra, 2017. "External Imbalances, Gross Capital Flows and Sovereign Debt Crises," 2017 Meeting Papers 726, Society for Economic Dynamics.
    19. Carlos Garriga & Finn E. Kydland & Roman Sustek, 2013. "Mortgages and Monetary Policy," NBER Working Papers 19744, National Bureau of Economic Research, Inc.
    20. Javier Andrés & Óscar Arce & Carlos Thomas, 2016. "When fiscal consolidation meets private deleveraging," Working Papers 1622, Banco de España;Working Papers Homepage.

    More about this item

    Keywords

    Current account adjustment; Liquidity trap; Debt deleveraging; Exchange rate;

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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