External financial stress is one of the causes of capital outflows and reduction in borrowing ability of emerging markets. Sudden reversal of capital inflows and disruption in access to the international capital markets could be threat for the domestic financial stability as in the case of Asian...

The effects of government spending on a small open economy (SOE) have attracted little attention in the New-Keynesian SOE literature. One exception is Monacelli and Perotti (2007). In this paper we extend their work in several dimensions. First, we include both asset holder and non-asset holder...