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Public Debt Indexation and Denomination, The Case of Brazil: A Comment

  • Cysne, Rubens Penha

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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Paper provided by FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil) in its series Economics Working Papers (Ensaios Economicos da EPGE) with number 579.

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Date of creation: 01 Mar 2005
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Handle: RePEc:fgv:epgewp:579
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  1. Zame, William R, 1993. "Efficiency and the Role of Default When Security Markets Are Incomplete," American Economic Review, American Economic Association, vol. 83(5), pages 1142-64, December.
  2. Henning Bohn, . "A Positive Theory of Foreign Currency Debt," Rodney L. White Center for Financial Research Working Papers 19-88, Wharton School Rodney L. White Center for Financial Research.
  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. Bohn, Henning, 1988. "Why do we have nominal government debt?," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 127-140, January.
  5. Missale, Alessandro, 1999. "Public Debt Management," OUP Catalogue, Oxford University Press, number 9780198290858, March.
  6. Ilan Goldfajn, 1998. "Public Debt Indexation and Denomination: The Case of Brazil," Working Papers Central Bank of Chile 27, Central Bank of Chile.
  7. Bohn, Henning, 1990. "Tax Smoothing with Financial Instruments," American Economic Review, American Economic Association, vol. 80(5), pages 1217-30, December.
  8. David Cass & Alessandro Citanna, 1998. "Pareto improving financial innovation in incomplete markets," Economic Theory, Springer, vol. 11(3), pages 467-494.
  9. Newbery, David M G & Stiglitz, Joseph E, 1984. "Pareto Inferior Trade," Review of Economic Studies, Wiley Blackwell, vol. 51(1), pages 1-12, January.
  10. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
  11. 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.
  12. 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).
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