SONOMA: a Small Open ecoNOmy for MAcrofinance

We develop a new small open economy model (SONOMA) in which domestic corporate debt and equities coexist (Jermann and Quadrini, 2012) and are affected by shocks to both external credit and equity markets. In a novel empirical analysis of several small-but-developed economies, we show that both external debt and equity shocks are important determinants of domestic economic fluctuations, corporate leverage, and net foreign asset positions. SONOMA replicates our empirical facts about asset prices, financial flows, and economic activity.