There is a general acceptance of the fact that a significant direct relationship between financial markets and macroeconomic variables exists, especially by considering the assertion that developed financial markets correspond to high GDP levels. This paper provides an investigation of the...

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...