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Is foreign-currency indexed debt a commitment technology? Some evidence from Brazil and Mexico

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  • William C. Gruben
  • Darryl McLeod

Abstract

We examine the effects of foreign currency-indexed debt upon inflationary expectations in Brazil and Mexico. Conjecturing that markets will view increasing overhangs of foreign currency-indexed debt as a commitment technology that fiscally punishes devaluation, we test whether increasing such overhangs will attenuate the effect of monetary growth upon inflationary expectations. We find some econometric confirmation of these conjectures in both the Brazilian and Mexican cases. Finding that the results are consistent with the notion that increasing the share of dollar indexed debt may also permit some temporary monetary independence even under pegged exchange rate regimes, we present some evidence of independent policy behavior during periods when are model results would suggest it. ; Economic Research Working Paper 9913

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File URL: http://dallasfed.org/assets/documents/research/claepapers/1999/lawp9902.pdf
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Paper provided by Federal Reserve Bank of Dallas in its series Center for Latin America Working Papers with number 0299.

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Date of creation: 1999
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Handle: RePEc:fip:feddcl:0299

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Keywords: Money ; Brazil ; Debt ; Financial crises - Latin America ; Indexation (Economics) ; Inflation (Finance) ; Mexico;

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  1. Alain Ize & Guillermo Ortiz, 1987. "Fiscal Rigidities, Public Debt, and Capital Flight," IMF Staff Papers, Palgrave Macmillan, vol. 34(2), pages 311-332, June.
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