In the present paper, we develop a two-sector general equilibrium model of a small open economy to explore the transmission mechanisms of external financial shocks. In particular, we use a cash-in-advance model with limited participation augmented with a financial friction in the form of a...

The present paper investigates how an emerging market economy is affected when it suddenly faces a higher risk premium on international capital markets. We study this question empirically for five Latin American economies over the period 1994-2007 within a structural panel vector autoregression...