IDEAS home Printed from https://ideas.repec.org/p/hkm/wpaper/202014.html
   My bibliography  Save this paper

Debt Deleveraging and the Zero Bound: Potentially Perverse Effects of Real Exchange Rate Movements

Author

Listed:
  • Paul Luk

    (Oxford University and Hong Kong Institute for Monetary Research)

  • David Vines

    (Oxford University and Centre for Applied Macroeconomic Analysis and Australian National University and Centre for Economic Policy Research)

Abstract

We present a microfounded two-country model of global imbalances and debt deleveraging. A sustained rise in saving in one country can lead to a worldwide fall in interest rates and an accumulation of debt in the other country. When a subsequent deleveraging shock occurs, interest rates are forced down further. In the presence of a zero bound to interest rates, the deleveraging country may face a combination of a large fall in output, deflation, a rise in real interest rates and real exchange rate appreciation. Such exchange rate appreciation will intensify the loss in output, magnify the deflation and further tighten the deleveraging constraint.

Suggested Citation

  • 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.
  • Handle: RePEc:hkm:wpaper:202014
    as

    Download full text from publisher

    File URL: http://www.hkimr.org/uploads/publication/392/wp-no-20_2014-final-.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Fernández-Villaverde, Jesús & Gordon, Grey & Guerrón-Quintana, Pablo & Rubio-Ramírez, Juan F., 2015. "Nonlinear adventures at the zero lower bound," Journal of Economic Dynamics and Control, Elsevier, pages 182-204.
    2. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, January.
    3. Aguiar, Mark & Gopinath, Gita, 2007. "Emerging Market Business Cycles: The Cycle is the Trend," Scholarly Articles 11988098, Harvard University Department of Economics.
    4. Hryshko, Dmytro & José Luengo-Prado, María & Sørensen, Bent E., 2010. "House prices and risk sharing," Journal of Monetary Economics, Elsevier, pages 975-987.
    5. Nakata, Taisuke, 2016. "Optimal fiscal and monetary policy with occasionally binding zero bound constraints," Journal of Economic Dynamics and Control, Elsevier, vol. 73(C), pages 220-240.
    6. Xiaodong Zhu, 2012. "Understanding China's Growth: Past, Present, and Future," Journal of Economic Perspectives, American Economic Association, vol. 26(4), pages 103-124, Fall.
    7. Jesus Fernandez-Villaverde & Pablo Guerron-Quintana & Juan F. Rubio-Ramirez & Martin Uribe, 2011. "Risk Matters: The Real Effects of Volatility Shocks," American Economic Review, American Economic Association, vol. 101(6), pages 2530-2561, October.
    8. Pierpaolo Benigno, 2009. "Price Stability with Imperfect Financial Integration," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(s1), pages 121-149, February.
    9. Philippe Bacchetta & Eric van Wincoop, 2016. "The Great Recession: A Self-Fulfilling Global Panic," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(4), pages 177-198, October.
    10. Choi, Horag & Mark, Nelson C. & Sul, Donggyu, 2008. "Endogenous discounting, the world saving glut and the U.S. current account," Journal of International Economics, Elsevier, pages 30-53.
    11. Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, 2011. "When Is the Government Spending Multiplier Large?," Journal of Political Economy, University of Chicago Press, vol. 119(1), pages 78-121.
    12. Kuralbayeva, Karlygash & Vines, David, 2009. "The process by which the Dollar will fall: the effect of forward-looking consumers," CEPR Discussion Papers 7325, C.E.P.R. Discussion Papers.
    13. Benigno, Pierpaolo & Romei, Federica, 2014. "Debt deleveraging and the exchange rate," Journal of International Economics, Elsevier, vol. 93(1), pages 1-16.
    14. Mark Aguiar & Gita Gopinath, 2007. "Emerging Market Business Cycles: The Cycle Is the Trend," Journal of Political Economy, University of Chicago Press, vol. 115, pages 69-102.
    15. Manoj Atolia & Edward F. Buffie, 2004. "Reverse Shooting Made Easy: Solving for the Global Nonlinear Saddle Path," Working Papers wp2009_01_01, Department of Economics, Florida State University, revised Jan 2009.
    16. Ben S. Bernanke, 2009. "Financial reform to address systemic risk: a speech at the Council on Foreign Relations, Washington, D.C., March 10, 2009," Speech 448, Board of Governors of the Federal Reserve System (U.S.).
    17. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2007. "The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970-2004," Journal of International Economics, Elsevier, vol. 73(2), pages 223-250, November.
    18. Gauti B. Eggertsson & Paul Krugman, 2012. "Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 127(3), pages 1469-1513.
    19. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    20. Correia, Isabel & Neves, Joao C. & Rebelo, Sergio, 1995. "Business cycles in a small open economy," European Economic Review, Elsevier, vol. 39(6), pages 1089-1113, June.
    21. Miles S. Kimball & Matthew D. Shapiro, 2008. "Labor Supply: Are the Income and Substitution Effects Both Large or Both Small?," NBER Working Papers 14208, National Bureau of Economic Research, Inc.
    22. Raffo, Andrea, 2008. "Net exports, consumption volatility and international business cycle models," Journal of International Economics, Elsevier, vol. 75(1), pages 14-29, May.
    23. repec:fip:fedgsq:y:2009:x:6 is not listed on IDEAS
    24. Obstfeld, Maurice & Rogoff, Kenneth, 2009. "Global imbalances and the financial crisis: products of common causes," Proceedings, Federal Reserve Bank of San Francisco, issue Oct, pages 131-172.
    25. Paul Krugman, 2007. "Will there be a dollar crisis?," Economic Policy, CEPR;CES;MSH, vol. 22, pages 435-467, July.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Global Imbalances; Debt Deleveraging; Liquidity Trap; Real Exchange Rate Number: 202014;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F3 - International Economics - - International Finance

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hkm:wpaper:202014. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (HKIMR). General contact details of provider: http://edirc.repec.org/data/hkimrhk.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.