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Fiscal costs of monetary policy: indirect effects of an interest rate shock on Brazilian public net debt

Author

Listed:
  • Laura Carvalho

    (Departamento de Economia da Universidade de São Paulo.)

  • André Diniz

    (Escola de Economia de São Paulo, da Fundação Getulio Vargas.)

  • Ítalo Pedrosa

    (Instituto de Economia da Universidade Estadual de Campinas.)

  • Pedro Rossi

    (Instituto de Economia da Universidade Estadual de Campinas.)

Abstract

The paper estimates the fiscal cost of an increase in the Brazilian policy interest rate – the SELIC – by considering not only the direct effect on the yield of public bonds that are indexed to the SELIC, but also indirect effects on: (i) the yield of public bonds that are indexed to the exchange rate and inflation, and (ii) the stock of public net debt through adjustments in the value of international reserves measured in domestic currency. Projections are based on the estimation of the relationship between interest rates, exchange rates and inflation by means of a vector auto-regression. We conclude that the inclusion of such indirect effects has an ambiguous effect on the response of the implicit interest rate on public net debt to shocks in the SELIC, when adjustments in the value of international reserves are not considered. However, the inclusion of the latter amplifies the fiscal cost of a more restrictive monetary policy. These results call fora better coordination between monetary, fiscal and exchange rate policies in Brazil. JEL Classification: E43, E52, E63, H63.

Suggested Citation

  • Laura Carvalho & André Diniz & Ítalo Pedrosa & Pedro Rossi, 2016. "Fiscal costs of monetary policy: indirect effects of an interest rate shock on Brazilian public net debt," Brazilian Journal of Political Economy, Center of Political Economy, vol. 36(3), pages 557-579, March.
    • Handle: RePEc:ekm:repojs:v:36:y:2016:i:3:id:95186
    DOI: 10.1590/0101-31572015v36n03a06
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    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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