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Understanding the interplay between firms’ balance sheets and the macro-economic environment is important for understanding of the Brazilian economy. A close examination of developments in the nonfinancial corporate sector up to the early 2015 reveals weak equity growth, declining profitability, and rising leverage. The empirical work suggests that adverse shocks to financial variables lead to weaker real GDP growth in Brazil through their effect on corporate leverage, borrowing costs, and default frequencies. An estimation based on a DSGE model with financial frictions indicates that the recent economic downturn in Brazil is largely driven by a decrease in total factor productivity and by negative financial shocks.

Accounting --- Investments: General --- Macroeconomics --- Production and Operations Management --- International Lending and Debt Problems --- International Business Cycles --- International Financial Markets --- Corporate Finance and Governance: General --- Computable and Other Applied General Equilibrium Models --- Financial Markets and the Macroeconomy --- Public Administration --- Public Sector Accounting and Audits --- Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data) --- Macroeconomics: Production --- Macroeconomics: Consumption --- Saving --- Wealth --- Investment --- Capital --- Intangible Capital --- Capacity --- Financial reporting, financial statements --- Economic growth --- Financial statements --- Business cycles --- Productivity --- Consumption --- Return on investment --- Public financial management (PFM) --- Production --- National accounts --- Finance, Public --- Industrial productivity --- Economics --- Saving and investment --- Brazil