Public Debt Indexation and Denomination: The Case of Brazil
February 1, 1998
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Summary
The paper models the optimal debt management strategy of the public sector when issuing nominal, price-level-indexed and foreign-denominated debt securities. The model predicts that the variance of inflation, the size of the public debt, the variance of the real exchange rate, and the correlation of inflation with public expenditures are the main determinants of public debt management. Using this framework, the paper analyzes the Brazilian experience with indexed debt in the last decade. In particular, it explains the large increase of indexed public debt in Brazil prior to the 1994 Real plan and, thereafter, the steady decline in its use.
Subject: External debt, Financial regulation and supervision, Foreign exchange, Hedging, Inflation, Prices, Public debt, Real exchange rates
Keywords: Brazil, composition system estimation, debt, debt holder, denominated debt, exchange rate, Hedging, indexation, indexation mechanism, indexed debt, Inflation, nominal debt, Public debt, Real exchange rates, real value, WP
Pages:
28
Volume:
1998
DOI:
Issue:
018
Series:
Working Paper No. 1998/018
Stock No:
WPIEA0181998
ISBN:
9781451922806
ISSN:
1018-5941
