Main Results | SONOMA

Main results

Our paper documents empirical facts about small developed open economies (SDEs) and shows that SONOMA reproduces their financial-flow, asset-price, and business-cycle patterns. The figures below present selected empirical findings from the paper.

Fact 1

Financial shocks shape external positions and investment

Financial shocks are first-order drivers of medium- and long-run fluctuations in external debt, external equity, and investment. Domestic credit shocks are especially important for external debt, while external credit shocks and external equity-market shocks play prominent roles in external equity and investment.

Paper Figure 1 forecast error variance decomposition bars — **Figure 1: Relevance of Exogenous Shocks.** Forecast error variance decompositions for net external debt, net external equity, investment, and corporate leverage.

Fact 2

Financial shocks differ between SDEs and EMEs

Expected external equity-return shocks play a larger role in SDE investment and leverage. In emerging market economies (EMEs), investment is relatively more sensitive to credit shocks, while exchange-rate and unexpected external equity-return shocks are more prominent.

Paper Figure 2 SDE minus EME shock relevance differences — **Figure 2: Difference in Relevance of Exogenous Shocks: SDEs Minus EMEs.** VAR specification including exchange-rate shocks.

Fact 3

External financial tightening signals lower long-run growth

Adverse external credit and expected external equity-return shocks are associated with lower expected long-run growth. Adverse expected external equity-return shocks also precede tighter domestic credit conditions.

Paper Figure 3 impulse responses to external financial shocks — **Figure 3: Empirical Impulse Responses to External Financial Shocks.**

Fact 4

External financial shocks contract investment

Adverse external credit and expected external equity-return shocks produce substantial declines in investment. SONOMA successfully reproduces these contractionary responses.

Model and data investment-growth responses: external credit conditions shock on the left and NEE-ER shock on the right — **Figure 8: Model versus VAR: Economic Aggregates.** Investment responses.