Inequality and Asset Prices during Sudden Stops

Sergio Villalvazo

No 1388, 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 Sudden Stop crises. Analyzing microdata from Mexico, we show that this dimension has macroeconomic implications that operate via opposing effects. We propose a small open economy, asset-pricing model with heterogeneous-agents and aggregate risk to measure the effects of inequality during crises. In contrast to a representative-agent model, heterogeneity generates persistent current account reversals with smaller drops in asset prices and larger drops in consumption driven by the leveraged households. Moreover, in a lower inequality calibration, we find that crises are less severe, 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)
Date: 2024-03-29
New Economics Papers: this item is included in nep-dge, nep-fdg and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1388

DOI: 10.17016/IFDP.2024.1388

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