The external financial constraint (Perez et al., 2021; 2022) can be described as the pressure on peripheral economies’ growth derived from their financial integration, openness to short-term speculative flows, and foreign currency indebtedness cum currency mismatches. This process may lead to some unpleasant implications for both monetary policy actions and distributive conflicts dynamics in financialized small open economies. To fully grasp the arithmetic of the latter we develop a stock-flow consistent (SFC) model based on the Latin American stylized facts regarding economic, financial, and distributional features. In the present framework, we take into account: i. the close relation between sovereign risk and sovereign premium and the

feedbacks between the two variables; ii. the influence of risk premium on corporate risk premium; iii. the role of currency mismatches in the private non-financial sector, their link with risk premiums and nominal exchange rate; iv. the importance of expectations for investment, which is captured by the introduction of an investment confidence index; v. the non-linear relation existing between debt and investment for Latin-American non- financial sector (Perez Caldentey et al., 2017); vi. The role of terms of trade in determining Thirwall’s Law,

nominal exchange rate (NER), short-term cross-border flows, and risk premiums; vii. The distribution of income between households; viii. the high penetration of foreign investors in domestic markets whose shift in preferences are often followed by outflows and currency depreciation; ix. the concern of central banks in the region on the level of exchange rate volatility, here captured by a volatility index that determines, together with the Taylor’s rule, the target bond level central banks want to hold. The model is calibrated with selected regional data to match empirical series on growth, investment and debt accumulation in the baseline. We then

analyze selected short to medium-run challenges for LAC. In particular, we simulate the impact of a tightening in monetary policies triggered by an increase in the benchmark international interest rate (i.e. the Fed policy rate). Scenario analysis shows that following this hike, financial yields and the profit-to-sale ratio will be positively affected as local capitalists will increase their spending and propping up investment. However, the combined effects of a compressions in wage share and the higher debt ratios and risk premia– for both public and private sectors – will lead to a reduction in GDP growth on top of feeding a continuous process of redistribution of income and currency devaluation.