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Asymmetric and Nonlinear Foreign Debt–Inflation Nexus in Brazil: Evidence from NARDL and Markov Regime Switching Approaches

Author

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  • Mesbah Fathy Sharaf

    (Department of Economics, Faculty of Arts, University of Alberta, Edmonton, AB T6G2H4, Canada
    Department of Economics, Faculty of Commerce, Damanhour University, Damanhour 22514, Egypt)

  • Abdelhalem Mahmoud Shahen

    (Department of Economics, Faculty of Economics Studies and Political Science, Alexandria University, Alexandria P.O. Box 5424041, Egypt
    Department of Economics, College of Economics and Administrative Sciences, Imam Mohammad Ibn Saud Islamic University (IMSIU), P.O. Box 5701, Riyadh 11432, Saudi Arabia)

  • Badr Abdulaziz Binzaid

    (Department of Economics, College of Economics and Administrative Sciences, Imam Mohammad Ibn Saud Islamic University (IMSIU), P.O. Box 5701, Riyadh 11432, Saudi Arabia)

Abstract

This paper augments the sparse literature on the inflationary impact of foreign debt in Brazil while addressing methodological caveats in previous studies. We depart from the linearity assumption and employ two nonlinear techniques: the nonlinear autoregressive distributed lag (NARDL) model and a Markov Switching Regression (MSR) to investigate the connection between foreign debt and inflation within a multivariate framework. The analyses consider the presence of structural breaks via assessing variable stationarity using the Zivot and Andrew unit root test and incorporating a residual-based cointegration test proposed by Gregory and Hansen. Additionally, we apply a multiple structural breakpoints test by Bai and Perron to determine the presence of structural breaks in the impact of foreign debt on inflation. Our findings robustly indicate that the domestic money supply has a statistically significant positive effect, while the nominal effective exchange rate has a negative effect on inflation in both the short and long run. The NARDL model reveals that only positive changes in foreign debt have a statistically significant negative effect on inflation in the short run, whereas both positive and negative foreign debt changes significantly affect inflation in the long run. The results from the MSR model are generally consistent with those of the NARDL model.

Suggested Citation

  • Mesbah Fathy Sharaf & Abdelhalem Mahmoud Shahen & Badr Abdulaziz Binzaid, 2024. "Asymmetric and Nonlinear Foreign Debt–Inflation Nexus in Brazil: Evidence from NARDL and Markov Regime Switching Approaches," Economies, MDPI, vol. 12(1), pages 1-20, January.
    • Handle: RePEc:gam:jecomi:v:12:y:2024:i:1:p:18-:d:1319679
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    References listed on IDEAS

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