Stockholm School of Economics
Department of Economics
Sveavagen 65, 11383
Information about this author at RePEc
NBER Working Papers and Publications
|October 2014||Dynamic Debt Deleveraging and Optimal Monetary Policy|
with Pierpaolo Benigno, Gauti B. Eggertsson: w20556
This paper studies optimal monetary policy under dynamic debt deleveraging once the zero bound is binding. Unlike the existing literature, the natural rate of interest is endogenous and depends on macroeconomic policy. Optimal monetary policy successfully raises the natural rate of interest by creating an environment that speeds up deleveraging, thus endogenously shortening the duration of the crisis and a binding zero bound. Inflation should be front loaded. Fiscal-policy multipliers can be even higher than in existing models, but depend on the way in which public spending is financed.
|March 2012||Debt Deleveraging and The Exchange Rate|
with Pierpaolo Benigno: w17944
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.
Published: “Debt Deleveraging and The Exchange Rate,” Journal of International Economics, 93, 1-16, (2014). (with F. Romei) citation courtesy of