Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/224520
Authors: 
Lutz, Flora
Zessner-Spitzenberg, Leopold
Year of Publication: 
2020
Series/Report no.: 
Beiträge zur Jahrestagung des Vereins für Socialpolitik 2020: Gender Economics
Abstract: 
We propose a small open economy model where agents borrow internationally and invest in liquid foreign assets to insure against liquidity shocks, which temporarily shut out the economy of short-term credit markets. Due to the presence of a pecuniary externality individual agents borrow too much and hold too little liquid assets relative to a social planner. This inefficiency rationalizes macroprudential policy interventions in the form of reserve accumulation at the central bank coupled with a tax on foreign borrowing. Unless combined with other measures, a tax on foreign borrowing is detrimental to welfare; it reduces agents' incentives to invest in liquid assets and thereby increases financial instability. Our model can quantitatively match the simultaneous depreciation of the exchange rate and contractions in output, gross trade ows, foreign liabilities and foreign reserves during sudden stop episodes.
Subjects: 
international reserves
sudden stops
liquidity
macroprudential policy
pecuniary externalities
JEL: 
D62
E44
F32
F34
F41
Document Type: 
Conference Paper

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