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Public Debt Management in Brazil

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  • Francesco Giavazzi
  • Alessandro Missale

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 suggests that a large share of the Brazilian debt should be indexed to the price level. Fixed-rate bonds should be preferred to Selic indexed bonds, while the share of dollar denominated (and indexed) bonds should be further reduced from the current high level.his 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 suggests that a large share of the Brazilian debt should be indexed to the price level. Fixed-rate bonds should be preferred to Selic indexed bonds, while the share of dollar denominated (and indexed) bonds should be further reduced from the current high level.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10394.

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Date of creation: Mar 2004
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Publication status: published as Giavezzi, Francesco, Ilan Goldfajn and Santiago Herrera (eds.) Inflation Targeting, Debt, and the Brazilian Experience, 1999 to 2003. Cambridge: MIT Press, 2005.
Handle: RePEc:nbr:nberwo:10394

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  1. Persson, M & Persson, T & Svensson, L-E-O, 1996. "Debt, Cash Flow and Inflation Incentives : A Swedish Example," Papers 613, Stockholm - International Economic Studies.
  2. Alessandro Missale, . "Optimal Debt Management with a Stability and Growth Pact," Working Papers 166, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  3. 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.
  4. 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.
  5. Ilan Goldfajn, 1998. "Public Debt Indexation and Denomination," IMF Working Papers 98/18, International Monetary Fund.
  6. Missale, Alessandro, 1999. "Public Debt Management," OUP Catalogue, Oxford University Press, number 9780198290858, September.
  7. 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.
  8. Márcio Gomes Pinto Garcia, 2002. "Public debt management, monetary policy and financial institutions," Textos para discussão 464, Department of Economics PUC-Rio (Brazil).
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Cited by:
  1. Melecky, Martin, 2012. "Formulation of public debt management strategies: An empirical study of possible drivers," Economic Systems, Elsevier, vol. 36(2), pages 218-234.
  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. Hans J. Blommestein & Javier Santiso, 2007. "New Strategies for Emerging Domestic Sovereign Bond Markets," OECD Development Centre Working Papers 260, OECD Publishing.
  4. Laura Alfaro & Fabio Kanczuk, 2006. "Deuda soberana: indexación y vencimiento," Research Department Publications 4460, Inter-American Development Bank, Research Department.
  5. Melecky, Martin, 2008. "An alternative framework for foreign exchange risk management of sovereign debt," Policy Research Working Paper Series 4458, The World Bank.
  6. 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.
  7. 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.

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