We study the adjustment process of a small open economy to a sudden worsening of external conditions. To model the sudden stop, we use a highly non-linear specification that captures credit constraints in a convenient way. The advantage of our approach is that the effects of the shock become...

Empirical evidence demonstrates that credit standards, including lending margins and collateral requirements, move in a countercyclical direction. In this study, we construct a small open economy model with financial frictions to generate the countercyclical movement in credit standards. Our...