Persistent credit shocks are priced, corporate leverage shapes domestic dynamics, and domestic financial flows interact with external credit and equity shocks.
Model
A small open economy with domestic frictions and external risk
SONOMA augments a benchmark small open economy with recursive preferences, long-run productivity risk, external debt and equity positions, and domestic corporate financing frictions.
Six shocks
State variables that move the economy
Short-run productivity
Current productivity growth fluctuations.
Long-run growth news
Persistent revisions to expected productivity growth.
Domestic credit
Shocks to the tightness of firms' borrowing constraint.
External credit
Shocks to the cost of borrowing from abroad.
External equity premium
Persistent shocks to expected external equity returns.
External equity return
Unexpected realized shocks to net external equity returns.
External balance sheet
The model decomposes net foreign assets into debt and equity components, allowing different adjustment margins and hedging benefits.
Corporate financing
A tax shield encourages debt issuance, while an enforcement constraint limits borrowing and creates a labor-market wedge.