Modelling the Outcome of Credit Shocks in Small Open Economy

Abstract

The literature analysis implicates that there are various forecasting models which were established in order to foresee the fluctuation of economy. Although the recent economic crisis has shown that large proportion of these models appeared to be misguiding. Mainly due to one reason – most models did not incorporate the external reasons of fluctuations of financial sector. While the research studies show that the risks that were engulfed by financial sector were one of the main drivers for the 2007- 2008 recessions. Moreover the use of dynamic and stochastic general equilibrium models (here and after DSGE) for the economies modelling purpose seems to be not adequate for forecasting crisis of such types. Thus the need of the model which incorporates the core financial sector performance factors is obvious. Therefore the main aim of this paper is to determine the factors for modelling the small and open economy’s cycles consequences. We try to explain what the outcomes of credit shocks are in small and open economy, and how it responds on the industry based data. It employs methods of analysis and systematization of literature and documents, as well as multifactorial statistical data analysis. DOI: 10.5901/mjss.2013.v4n9p619