Irving Fisher’s well-known paper in Econometrica, “The Debt-Deflation Theory of Great Depressions,” from 1933 provided inspiration. We also came across a new volume, “The Risk of Economic Crisis”, edited by Martin Feldstein and containing interesting contributions by, among others, Benjamin Friedman, Paul Krugman, Lawrence Summers and our chairman today, E. Gerald Corrigan.
And so when exchange rates are fixed, adjustment can still take place, but it comes at a high cost - through shrinking output and rising unemployment in countries with current account deficits, and eventually through very high inflation in countries with current account surpluses.