Kuvshinov, Dmitry, Müller, Gernot, Wolf, Martin, (2015), “Deleveraging, deflation and depreciation in the euro area”, Centre for Economic Policy Research, December.
During the post-crisis period, economic performance has been highly heterogenous across the euro area. While some economies rebounded quickly after the 2009 output collapse, others are undergoing a protracted further decline as part of an extensive deleveraging process. At the same time, inflation has been subdued throughout the whole of the euro area and intra-euro-area exchange rates have hardly moved. We interpret these facts through the lens of a two-country model of a currency union. We find that deleveraging in one country generates deflationary spillovers which cannot be contained by monetary policy, as it becomes constrained by the zero lower bound. As a result, the real exchange rate response becomes muted, and the output collapse—concentrated in the deleveraging economies.
Relevant Posts
- Bornhorst, F. and Ruiz Arranz, M., (2013), “The perils of private-sector deleveraging in the Eurozone”,VoxEU, 10 November.
- Theodoropoulou, Sotiria, (2015), “How to avert the risk of deflation in Europe: rethinking the policy mix and European economic governance”, European trade union institute, No 16, 2015.