The focus of this paper is on news-driven business cycles in small open economies. We make two significant contributions. First, we develop a small open economy model where the presence of financial frictions permits the replication of business cycle co-movements in response to news shocks....

We develop a general theory of state-dependent fiscal multipliers in a framework featuring interaction between two empirically relevant goods market frictions: idle productive capacity and unsatisfied demand. Our key novel finding is that the source of economic fluctuations determines the...