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Discussion Paper Details

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Title: Deleveraging, deflation and depreciation in the euro area

Author(s): Dmitry Kuvshinov, Gernot M�ller and Martin Wolf

Publication Date: December 2015

Keyword(s): currency union, deflationary spillovers, deleveraging, downward wage rigidity, paradox of flexibility, real exchange rate and zero lower bound

Programme Area(s): International Macroeconomics and Finance

Abstract: 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.

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Bibliographic Reference

Kuvshinov, D, M�ller, G and Wolf, M. 2015. 'Deleveraging, deflation and depreciation in the euro area'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=11015