Sudden Stops and Optimal Policy in a Two-agent Economy

Nina Biljanovska and Alexandros Vardoulakis

No 2022/147, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: Sudden Stops; agent heterogeneity; macroprudential policy; payroll tax policy; representative-agent economy; representative-agent setup; two-agent Economy; two-agent economy; Payroll tax; Self-employment; Collateral; Asset prices; Global (search for similar items in EconPapers)
Pages: 54
Date: 2022-07-22
New Economics Papers: this item is included in nep-cba and nep-dge
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