This paper introduces a framework for analyzing the role of financial factors as a source of instability in small open economies. Our basic model is a dynamic open economy model with a tradeable good produced with capital and a country-specific factor. We also assume that firms face credit...

We first empirically document that excessive credit growth and asset price overvaluations raise the likelihood of financial crises and deepen the severity of associated economic downturns in advanced economies using linear probability models and local projections. We then rationalise these...

In this paper we investigate the effects of uncertainty shocks on economic activity using a Dynamic Stochastic General Equilibrium (DSGE) model with heterogenous agents and a stylized banking sector. We show that frictions in credit supply amplify the effects of uncertainty shocks on economic...