Sudden Stops and Optimal Policy in a Two-agent Economy

By Nina Biljanovska, Alexandros Vardoulakis

July 22, 2022

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Format: Chicago

Nina Biljanovska, and Alexandros Vardoulakis. Sudden Stops and Optimal Policy in a Two-agent Economy, (USA: International Monetary Fund, 2022) accessed November 12, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We introduce heterogeneity in terms of workers and entrepreneurs in an otherwise standard Fisherian model to study Sudden Stop dynamics and optimal policy. We show that the distinction between workers and entrepreneurs introduces a distributive externality that is absent from the representative-agent setup. While in tranquil times redistribution is driven by the relative marginal utilities of consumption, the planner additionally favors entrepreneurs during Sudden Stops to mitigate Fisherian deation. Although agentheterogeneity does not add much in explaining the Sudden Stop phenomena, it adds to the understanding of how policies can best be designed to alleviate the negative effects of Sudden Stops.

Subject: Asset prices, Balance of payments, Collateral, Financial institutions, Labor, Payroll tax, Prices, Self-employment, Sudden stops, Taxes

Keywords: Agent heterogeneity, Asset prices, Collateral, Global, Macroprudential policy, Payroll tax, Payroll tax policy, Representative-agent economy, Representative-agent setup, Self-employment, Sudden Stops, Two-agent economy, Two-agent Economy

Publication Details

Pages:

54
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2022/147
Stock No:

WPIEA2022147
ISBN:

9798400215629
ISSN:

1018-5941

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