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Public debt indexation and denomination, the case of Brazil: a comment

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  • Rubens Penha Cysne

    (Graduate School of Economics, Getulio Vargas Foundation (EPGE|FGV), Rio de Janeiro, RJ, Brazil)

Abstract

In this work I analyse the model proposed by Goldfajn to study the choice of the denomination of the public debt. The main purpose of the analysis is to point out possible reasons why new empirical evidence provided by Bevilacqua et al., regarding a more recent time period, gives less empirical support to the model. I also provide a measure of the overestimation of welfare gains from hedging the debt caused by the simplified time frame of Goldfajn's model. Assuming a time-preference parameter of 0.9, for instance, consumption gains associated with a hedge to the debt that reduces by half a one-time 20%-of-GDP shock to government spending run around 1.43% under the no-tax-smoothing structure of the model. Under a Ramsey allocation, though, consumption increases by just 0.05%. Copyright © 2007 John Wiley & Sons, Ltd.

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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

Volume (Year): 12 (2007)
Issue (Month): 4 ()
Pages: 417-425

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Handle: RePEc:ijf:ijfiec:v:12:y:2007:i:4:p:417-425

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  1. Goldfajn, Ilan, 2000. "Public Debt Indexation and Denomination: The Case of Brazil," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 5(1), pages 43-56, February.
  2. Bohn, Henning, 1990. "A positive theory of foreign currency debt," Journal of International Economics, Elsevier, vol. 29(3-4), pages 273-292, November.
  3. David Cass & Alessandro Citanna, 1998. "Pareto improving financial innovation in incomplete markets," Economic Theory, Springer, vol. 11(3), pages 467-494.
  4. Robert J. Barro, 1997. "Optimal Management of Indexed and Nominal Debt," NBER Working Papers 6197, National Bureau of Economic Research, Inc.
  5. Bohn, Henning, 1990. "Tax Smoothing with Financial Instruments," American Economic Review, American Economic Association, vol. 80(5), pages 1217-30, December.
  6. Newbery, David M G & Stiglitz, Joseph E, 1984. "Pareto Inferior Trade," Review of Economic Studies, Wiley Blackwell, vol. 51(1), pages 1-12, January.
  7. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October.
  8. Zame, William R, 1993. "Efficiency and the Role of Default When Security Markets Are Incomplete," American Economic Review, American Economic Association, vol. 83(5), pages 1142-64, December.
  9. Missale, Alessandro, 1999. "Public Debt Management," OUP Catalogue, Oxford University Press, number 9780198290858.
  10. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
  11. Bohn, Henning, 1988. "Why do we have nominal government debt?," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 127-140, January.
  12. Calvo, Guillermo A, 1978. "On the Time Consistency of Optimal Policy in a Monetary Economy," Econometrica, Econometric Society, vol. 46(6), pages 1411-28, November.
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Cited by:
  1. Barbosa, Fernando de Holanda, 2005. "The Contagion Effect of Public Debt on Monetary Policy: The Brazilian Experience," Economics Working Papers (Ensaios Economicos da EPGE) 591, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  2. Bonomo, Marco Antônio Cesar & Terra, Maria Cristina T., 2005. "Special Interests and Political Business Cycles," Economics Working Papers (Ensaios Economicos da EPGE) 597, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  3. Araújo, Fabio & Issler, João Victor & Fernandes, Marcelo, 2005. "Estimating the Stochastic Discount Factor without a Utility Function," Economics Working Papers (Ensaios Economicos da EPGE) 583, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).

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