Monetary policy, financial dollarization and agency costs (Capítulo)

Abstract

This chapter models an emerging economy with financial dollarization features within an optimizing, stochastic general equilibrium setup. One key result in this framework is that unexpected nominal exchange rate fluctuations are positively correlated with the probability of default by borrowing firms and turn out to be a relevant driver of economic activity. In particular, the sign of the unexpected depreciation is positively correlated to the real value of assets and negatively correlated to aggregate consumption. This result supports the idea that unexpected increases in the exchange rate are contractionary, and not expansionary, when dollarization and agency costs in the financial sector are considered.