Public debt and risk premium
Purpose - This analysis seeks to deal with the emerging economies and to reveal that, if the fiscal authority is accountable with a policy that stabilizes the public debt/GDP ratio, the consequence is a low Treasury bond risk premium. Design/methodology/approach - Based on the purpose of this paper, a theoretical model is developed and empirical evidence through an autoregressive distributed lag (ADL) model, taking into account the Brazilian experience, is made. Findings - The findings denote that domestic variables are responsible for determining the risk premium. Moreover, a correct management of the public debt and the use of primary surplus targets make for a good strategy for promoting a fall in the Treasury bond risk premium. Practical implications - Primary surplus and public debt/GDP ratio can be used as important tools for mitigating the Treasury bond risk premium. Originality/value - The results of the paper give some new insights about the management of fiscal policy for developing countries.
Volume (Year): 38 (2011)
Issue (Month): 2 (May)
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