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

  • Cysne, Rubens Penha

In this work I analyze the model proposed by Goldfajn (2000) to study the choice of the denomination of the public debt. The main purpose of the analysis is pointing out possible reasons why new empirical evidence provided by Bevilaqua, Garcia and Nechio (2004), regarding a more recent time period, Önds a lower empirical support to the model. I also provide a measure of the overestimation of the welfare gains of hedging the debt led by the simpliÖed time frame of the model. Assuming a time-preference parameter of 0.9, for instance, welfare gains associated with a hedge to the debt that reduces to a half a once-for-all 20%-of-GDP shock to government spending run around 1.43% of GDP under the no-tax-smoothing structure of the model. Under a Ramsey allocation, though, welfare gains amount to just around 0.05% of GDP.

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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
Date of revision:
Handle: RePEc:fgv:epgewp:579
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  1. 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).
  2. Missale, Alessandro, 1999. "Public Debt Management," OUP Catalogue, Oxford University Press, number 9780198290858, December.
  3. David Cass & Alessandro Citanna, 1998. "Pareto Improving Financial Innovation in Incomplete Markets," Post-Print hal-00479286, HAL.
  4. Bohn, Henning, 1990. "Tax Smoothing with Financial Instruments," American Economic Review, American Economic Association, vol. 80(5), pages 1217-30, December.
  5. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
  6. 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.
  7. David M. G. Newbery & Joseph E. Stiglitz, 1984. "Pareto Inferior Trade," Review of Economic Studies, Oxford University Press, vol. 51(1), pages 1-12.
  8. Bohn, Henning, 1988. "Why do we have nominal government debt?," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 127-140, January.
  9. 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.
  10. Robert Barro, 2003. "Optimal Management of Indexed and Nominal Debt," Annals of Economics and Finance, Society for AEF, vol. 4(1), pages 1-15, May.
  11. William R. Zame, 1990. "Efficiency and the Role of Default When Security Markets are Incomplete," UCLA Economics Working Papers 585, UCLA Department of Economics.
  12. Ilan Goldfajn, 1998. "Public Debt Indexation and Denomination; The Case of Brazil," IMF Working Papers 98/18, International Monetary Fund.
  13. 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.
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