Sudden Stops and optimal policy in a two-agent economy

Nina Biljanovska and Alexandros P. Vardoulakis

Journal of International Economics, 2024, vol. 148, issue C

Abstract: We introduce heterogeneity between workers and entrepreneurs in a standard Fisherian model to study Sudden Stop dynamics and optimal policy. The distinction between workers and entrepreneurs introduces a redistributive motive that meaningfully interacts with Fisherian deflation. 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 deflation. We show how heterogeneity adds to the understanding of how ex ante and ex post policies can be best designed to alleviate the negative effects of Sudden Stops.

Keywords: Sudden stops; Agent heterogeneity; Macroprudential policy; Payroll tax policy (search for similar items in EconPapers)
JEL-codes: E2 E44 G1 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:148:y:2024:i:c:s0022199624000187

DOI: 10.1016/j.jinteco.2024.103894

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