International Finance Discussion Papers (IFDP)
March 2024
Inequality and Asset Prices during Sudden Stops
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
DOI: https://doi.org/10.17016/IFDP.2024.1388
PDF: Full Paper
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