Financial Frictions in Small Economies Lead to Recurring Output Busts.
Financial frictions can limit a country's ability to borrow money from other countries to protect against economic shocks. A study found that these frictions lead to excessive volatility in a small open economy's GDP and current account. This means that the economy experiences sudden drops in output and unexpected changes in its trade balance. The study focused on Mexico and showed that these patterns are significant features of its economy.