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Public Debt Management in Brazil

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  • Giavazzi, Francesco
  • Missale, Alessandro

Abstract

This Paper derives the optimal composition of the Brazilian public debt by looking at the relative impact of the risk and cost of alternative debt instruments on the probability of missing the stabilization target. This allows to price risk against the expected cost of debt service and thus to find the optimal combination along the trade-off between cost and risk minimization. The optimal debt structure is a function of the expected return differentials between debt instruments, of the conditional variance of debt returns and of their covariances with output growth, inflation, exchange-rate depreciation and the Selic rate. We estimate the relevant covariances by: i) exploiting the daily survey of expectations; ii) simulating a small structural model of the Brazilian economy under different shocks; iii) estimating the unanticipated components of the relevant variables with forecasting regressions. The empirical evidence strongly supports the funding strategy of Brazilian Treasury in 2003 of relying heavily on fixed-rate LTN bonds. It also supports its recent decision to revitalize the market for price-indexed bonds with the new NTN-B program of IPCA indexation. Though decreasing, the exposure to exchange rate risk appears too large suggesting that more efforts should be made to reduce funding in foreign currencies.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4293.

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Date of creation: Mar 2004
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Handle: RePEc:cpr:ceprdp:4293

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  1. Bevilaqua, Afonso S & Garcia, Marcio G P, 2002. "Debt Management in Brazil: Evaluation of the Real Plan and Challenges Ahead," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 7(1), pages 15-35, January.
  2. Persson, Mats & Persson, Torsten & Svensson, Lars E O, 1996. "Debt, Cash Flow and Inflation Incentives: A Swedish Example," CEPR Discussion Papers 1488, C.E.P.R. Discussion Papers.
  3. Falcetti, Elisabetta & Missale, Alessandro, 2002. "Public debt indexation and denomination with an independent central bank," European Economic Review, Elsevier, vol. 46(10), pages 1825-1850, December.
  4. Missale, Alessandro, 1999. "Public Debt Management," OUP Catalogue, Oxford University Press, number 9780198290858.
  5. Carlo Ambrogio Favero & Francesco Giavazzi, . "Why are Brazil´s Interest Rates so High?," Working Papers 224, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  6. Ilan Goldfajn, 1998. "Public Debt Indexation and Denomination," IMF Working Papers 98/18, International Monetary Fund.
  7. Márcio Gomes Pinto Garcia, 2002. "Public debt management, monetary policy and financial institutions," Textos para discussão 464, Department of Economics PUC-Rio (Brazil).
  8. Alessandro Missale, . "Optimal Debt Management with a Stability and Growth Pact," Working Papers 166, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
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Cited by:
  1. Melecky, Martin, 2008. "An alternative framework for foreign exchange risk management of sovereign debt," Policy Research Working Paper Series 4458, The World Bank.
  2. Martin Melecky, 2012. "Choosing The Currency Structure Of Foreign‐Currency Debt: A Review Of Policy Approaches," Journal of International Development, John Wiley & Sons, Ltd., vol. 24(2), pages 133-151, 03.
  3. Aleš Melecký & Martin Melecký, 2012. "The Impact of Macroeconomic Shocks on the Government Debt Dynamics: How Robust is the Fiscal Stance of the Czech Republic?," Politická ekonomie, University of Economics, Prague, vol. 2012(6), pages 723-742.
  4. Fábio Giambiagi, 2006. "A Política Fiscal do Governo Lula em Perspectiva Histórica: Qual é o Limite para o Aumento do Gasto Público?," Discussion Papers 1169, Instituto de Pesquisa Econômica Aplicada - IPEA.
  5. Hans J. Blommestein & Javier Santiso, 2007. "New Strategies for Emerging Domestic Sovereign Bond Markets," OECD Development Centre Working Papers 260, OECD Publishing.
  6. Laura Alfaro & Fabio Kanczuk, 2006. "Deuda soberana: indexación y vencimiento," Research Department Publications 4460, Inter-American Development Bank, Research Department.
  7. Melecky, Martin, 2012. "Formulation of public debt management strategies: An empirical study of possible drivers," Economic Systems, Elsevier, vol. 36(2), pages 218-234.

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