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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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    More about this item

    Keywords

    Current account adjustment; Liquidity trap; Debt deleveraging; Exchange rate;
    All these keywords.

    JEL classification:

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

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