Title: SONOMA: a Small Open ecoNOmy for MAcrofinance
Authors: Mariano Croce - Bocconi (Italy) [presenting]
Abstract: A new small open economy model with recursive preferences is developed in which international and corporate debts are jointly determined at the equilibrium. The economy faces both internal credits shocks and shocks to the cost of external debt. We quantify the relevance of credits shocks and credit frictions in the determination of the equity risk premium and offer a novel benchmark model designed to replicate key properties of small EU countries. Our setting is flexible and can be easily extended to address fiscal, monetary, and macro-prudential policies in an economy in which equity risk matters.