Inequality and Asset Prices during Sudden Stops

Sergio Villalvazo

No 1388r1, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper studies the cross-sectional dimension of Fisher's debt-deflation mechanism that triggers endogenous Sudden Stop crises-i.e., episodes with large reversals in the current account. Analyzing microdata from Mexico, we show that this dimension has macroeconomic implications that operate via opposing effects. First, an amplifying effect by which households with high leverage fire-sale their assets during crises, increasing downward pressure on asset prices. Second, a dampening effect by which wealthy households with low leverage buy depressed assets, relieving downward pressure on asset prices. As a result, the role of inequality during crises is ambiguous. We conduct a quantitative analysis using a calibrated small open economy, asset-pricing model with heterogeneous agents and aggregate risk to measure the effects of inequality during crises. The model suggests that economies with lower inequality, whether due to reduced idiosyncratic risk or wealth redistribution across agents, experience less severe crises, as observed in the data.

Keywords: Inequality; Sudden Stops; Debt-deflation; Asset-pricing; Household leverage (search for similar items in EconPapers)
JEL-codes: D31 E21 E44 F32 F41 G01 (search for similar items in EconPapers)
Pages: 56 p.
Date: 2024-03-29, Revised 2025-12-17
New Economics Papers: this item is included in nep-dge, nep-fdg and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.federalreserve.gov/econres/ifdp/files/ifdp1388r1.pdf (application/pdf)

Related works:
Journal Article: Inequality and asset prices during Sudden Stops (2026)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1388

DOI: 10.17016/IFDP.2024.1388r1

Access Statistics for this paper

More papers in International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.) Contact information at EDIRC.
Bibliographic data for series maintained by Ryan Wolfslayer ; Keisha Fournillier ().