Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/264774 
Authors: 
Year of Publication: 
2013
Series/Report no.: 
Working Paper No. 182
Publisher: 
Oesterreichische Nationalbank (OeNB), Vienna
Abstract: 
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.
Subjects: 
Global Debt Deleveraging
Liquidity Trap
Monetary Union
Precautionary Savings
Debt Deflation
JEL: 
E31
E44
E52
F32
F34
F41
G01
G15
Document Type: 
Working Paper

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