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Policy mix, public debt management, and fiscal rules - lessons from the 2002 Brazilian crisis

  • Herrera, Santiago
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    Despite significant progress in economic reformthroughout the 1990s, and an exemplary development of the policymaking framework in the second part of the decade, Brazil suffered a major public debt and currency crisis in 2002. Though the political origin of the uncertainty cannot be ignored, the author identifies other sources of uncertainty emanating from the policymaking framework: fiscal policy was not responsive to the shocks, public debt instruments were used with several objectives (to stabilize the currency and to lengthen maturity) and there was inadequate supervision of agents holding public debt. Most of the flaws have been fixed following the crisis: a) The primary fiscal balance has been increased, sending the signal that it is a flexible instrument that will be used to ensure commitment of the sovereign to honor its obligations. b) The central bank formally transferred to the Treasury the remaining debt-issuance functions, facilitating a more adequate balancing of different risks involved in debt management. c) Mutual funds'public debt holdings are better regulated, ensuring that end-investors have the proper information to assess the risk of the institutions in which they invest.

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    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3512.

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    Date of creation: 01 Feb 2005
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    Handle: RePEc:wbk:wbrwps:3512
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    1. Minella, Andre & de Freitas, Paulo Springer & Goldfajn, Ilan & Muinhos, Marcelo Kfoury, 2003. "Inflation targeting in Brazil: constructing credibility under exchange rate volatility," Journal of International Money and Finance, Elsevier, vol. 22(7), pages 1015-1040, December.
    2. Blanchard, Olivier J & Giavazzi, Francesco, 2004. "Improving the SGP Through a Proper Accounting of Public Investment," CEPR Discussion Papers 4220, C.E.P.R. Discussion Papers.
    3. Herrera, Santiago & Perry, Guillermo & Quintero, Neile, 2000. "Output fluctuations in Latin America - what explains the recent slowdown?," Policy Research Working Paper Series 2333, The World Bank.
    4. Alberto Alesina & Roberto Perotti, 1996. "Fiscal Adjustments in OECD Countries: Composition and Macroeconomic Effects," IMF Working Papers 96/70, International Monetary Fund.
    5. Lars E.O. Svensson, 2002. "What Is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules," Working Papers 118, Princeton University, Department of Economics, Center for Economic Policy Studies..
    6. Narayana Kocherlakota & Christopher Phelan, 1999. "Explaining the fiscal theory of the price level," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 14-23.
    7. MINELLA André & DE FREITAS Paulo Springer & GOLDFAJN Ilan & KFOURY MUINHOS Marcelo, . "Inflation Targeting in Brazil: Constructing Credibility under Exchange Rate Volatility," EcoMod2003 330700103, EcoMod.
    8. Brian Sack & Robert Elsasser, 2002. "Treasury inflation-indexed debt: a review of the U.S. experience," Finance and Economics Discussion Series 2002-32, Board of Governors of the Federal Reserve System (U.S.).
    9. George Kopits & Steven A. Symansky, 1998. "Fiscal Policy Rules," IMF Occasional Papers 162, International Monetary Fund.
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