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Debt Deleveraging and The Exchange Rate

  • Pierpaolo Benigno
  • Federica Romei

Deleveraging from high debt can provoke deep recession with significant international side effects. The exchange rate of the deleveraging country will depreciate in the short run and appreciate in the long run. The real interest rate will fall by more than in the rest of the world. Bounds and policies that constrain the adjustment can prolong and deepen the recession. Early exit strategies from accommodating monetary policy can be quite harmful, as can such other policies as keeping interest rates too high during the deleveraging period. The analysis also applies to a monetary union facing internal adjustment of current account imbalances.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17944.

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Date of creation: Mar 2012
Date of revision:
Publication status: published as “Debt Deleveraging and The Exchange Rate,” Journal of International Economics, 93, 1-16, (2014). (with F. Romei)
Handle: RePEc:nbr:nberwo:17944
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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