Debt Deleveraging and the Exchange Rate

43 Pages Posted: 25 May 2012

See all articles by Pierpaolo Benigno

Pierpaolo Benigno

Luiss Guido Carli University; Einaudi Institute for Economics and Finance (EIEF)

Federica Romei

Luiss Guido Carli University

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Date Written: April 2012

Abstract

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.

Keywords: Current Account adjustment

JEL Classification: E40

Suggested Citation

Benigno, Pierpaolo and Romei, Federica, Debt Deleveraging and the Exchange Rate (April 2012). CEPR Discussion Paper No. DP8938. Available at SSRN: https://ssrn.com/abstract=2066311

Pierpaolo Benigno (Contact Author)

Luiss Guido Carli University

Viale Romania 32
Rome, Roma 00197
Italy

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Due Macelli, 73
Rome, 00187
Italy

Federica Romei

Luiss Guido Carli University ( email )

Via O. Tommasini 1
Rome, Roma 00100
Italy

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