Abstract for: A Framework for Evaluating the Macro-financial Stability and Economic Resilience of Small Open Economies

The paper studies the disequilibrium dynamics of an inter-temporal economy with boundedly rational agents operating in markets with financial frictions, which are exposed to unanticipated exogenous shocks. The model incorporates five stylized agents, namely households, businesses, banks, a government and a credit rating agency. Agents, including the households, government and banks, are allowed to default on their financial obligations made in an earlier period. In so doing the paper examines the "feedback" relationships between sovereign debt dynamics, the stability of financial institutions, households, and a government in a small open economy. The framework is calibrated to the case of Jamaica and in a set of counterfactual exercises considers the impact on macro-financial stability, and in particular the sustainability of household indebtedness, arising from a fall-out in employment and heightened debt servicing costs. The model does well in developing a causality-driven approach to understanding the spill-over of risks from one sector of the economy to another when the agents interact over time