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Public debt indexation and denomination, the case of Brazil: a comment

  • Rubens Penha Cysne

    (Graduate School of Economics, Getulio Vargas Foundation (EPGE|FGV), Rio de Janeiro, RJ, Brazil)

In this work I analyse the model proposed by Goldfajn to study the choice of the denomination of the public debt. The main purpose of the analysis is to point out possible reasons why new empirical evidence provided by Bevilacqua et al., regarding a more recent time period, gives less empirical support to the model. I also provide a measure of the overestimation of welfare gains from hedging the debt caused by the simplified time frame of Goldfajn's model. Assuming a time-preference parameter of 0.9, for instance, consumption gains associated with a hedge to the debt that reduces by half a one-time 20%-of-GDP shock to government spending run around 1.43% under the no-tax-smoothing structure of the model. Under a Ramsey allocation, though, consumption increases by just 0.05%. Copyright © 2007 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/ijfe.334
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Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

Volume (Year): 12 (2007)
Issue (Month): 4 ()
Pages: 417-425

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Handle: RePEc:ijf:ijfiec:v:12:y:2007:i:4:p:417-425
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  1. Bohn, Henning, 1990. "Tax Smoothing with Financial Instruments," American Economic Review, American Economic Association, vol. 80(5), pages 1217-30, December.
  2. Bohn, Henning, 1988. "Why do we have nominal government debt?," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 127-140, January.
  3. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October.
  4. Ilan Goldfajn, 1998. "Public Debt Indexation and Denomination: The Case of Brazil," Working Papers Central Bank of Chile 27, Central Bank of Chile.
  5. William R. Zame, 1990. "Efficiency and the Role of Default When Security Markets are Incomplete," UCLA Economics Working Papers 585, UCLA Department of Economics.
  6. David Cass & Alessandro Citanna, 1998. "Pareto improving financial innovation in incomplete markets," Economic Theory, Springer, vol. 11(3), pages 467-494.
  7. Calvo, Guillermo A, 1978. "On the Time Consistency of Optimal Policy in a Monetary Economy," Econometrica, Econometric Society, vol. 46(6), pages 1411-28, November.
  8. Robert E. Lucas Jr. & Nancy L. Stokey, 1982. "Optimal Fiscal and Monetary Policy in an Economy Without Capital," Discussion Papers 532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. Ilan Goldfajn & Áureo Nilo de Paula, 1999. "Uma nota sobre a composição ótima da dívida pública - reflexões para o caso brasileiro," Textos para discussão 411, Department of Economics PUC-Rio (Brazil).
  10. Bohn, Henning, 1990. "A positive theory of foreign currency debt," Journal of International Economics, Elsevier, vol. 29(3-4), pages 273-292, November.
  11. Newbery, David M G & Stiglitz, Joseph E, 1984. "Pareto Inferior Trade," Review of Economic Studies, Wiley Blackwell, vol. 51(1), pages 1-12, January.
  12. Missale, Alessandro, 1999. "Public Debt Management," OUP Catalogue, Oxford University Press, number 9780198290858, March.
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