NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Debt Deleveraging and The Exchange Rate

Pierpaolo Benigno, Federica Romei

NBER Working Paper No. 17944
Issued in March 2012
NBER Program(s):   EFG   IFM   ME

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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This paper was revised on November 14, 2012

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Document Object Identifier (DOI): 10.3386/w17944

Published: “Debt Deleveraging and The Exchange Rate,” Journal of International Economics, 93, 1-16, (2014). (with F. Romei) citation courtesy of

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