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Sudden Stops and optimal policy in a two-agent economy

Author

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  • Biljanovska, Nina
  • Vardoulakis, Alexandros P.

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.

Suggested Citation

  • Biljanovska, Nina & Vardoulakis, Alexandros P., 2024. "Sudden Stops and optimal policy in a two-agent economy," Journal of International Economics, Elsevier, vol. 148(C).
    • Handle: RePEc:eee:inecon:v:148:y:2024:i:c:s0022199624000187
    DOI: 10.1016/j.jinteco.2024.103894
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    Keywords

    Sudden stops; Agent heterogeneity; Macroprudential policy; Payroll tax policy;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G1 - Financial Economics - - General Financial Markets

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