Non-financial firms debt in foreign currency and its effect on the business cycle of small open economies : the impact of the exchange rate on debt dynamics.

Summary "Important non-financial firms debt levels in foreign currency have been achieved in many emerging countries. The consequences of important exchange rate depreciations raise concerns about the effects on the economy aggregate such an investment. This paper studies the role of exchange rate shocks in explaining debt dynamics in foreign currency for non-financial firms and the impact on the economy aggregates. The analysis is based in a DSGE model inspired on the work of Mendoza (2010). We showed that exchange rate appreciation periods diminish the probability of having a financial crisis, and is correlated with higher leverage in the economy for the firms. We also showed that fluctuations of economy aggegates are amplified when there is a depreciation of the exchange rate and reduced it during exchange rate appreciation periods.