International Debt Deleveraging

Arbeitspapier

I provide a framework for understanding debt deleveraging in a group of _nancially integrated countries. During an episode of international deleveraging world consumption demand is depressed and the world interest rate is low, reecting a high propensity to save. If exchange rates are allowed to oat, deleveraging countries can depreciate their nominal exchange rate 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 o_, and therefore the falls in consumption demand and in the world interest rate are ampli_ed. Hence, monetary unions are especially prone to hit the zero lower bound on the nominal interest rate and enter a liquidity trap during deleveraging. In a liquidity trap deleveraging gives rise to a union-wide recession, which is particularly severe in high-debt countries. The model suggests several policy interventions that mitigate the negative impact of deleveraging on output in monetary unions.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. 182

Classification and Topics

• Classification: Wirtschaft ; Price Level; Inflation; Deflation ; Financial Markets and the Macroeconomy ; Monetary Policy ; Current Account Adjustment; Short-term Capital Movements ; International Lending and Debt Problems ; Open Economy Macroeconomics ; Financial Crises ; International Financial Markets
• Subject: Global Debt Deleveraging ; Liquidity Trap ; Monetary Union ; Precautionary Savings ; Debt Deflation ; Internationale Staatsschulden ; Internationale Liquidität ; Sparen ; Kapitalstruktur ; Deflation ; Konjunktur ; Währungsunion ; Kleine offene Volkswirtschaft ; Mehr-Länder-Modell ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Fornaro, Luca
• Event: Veröffentlichung
• (who): Oesterreichische Nationalbank (OeNB)
• (where): Vienna
• (when): 2013

Further information

• Handle: http://hdl.handle.net/10419/264774
• Last update: 10.03.2025, 11:43 AM CET