Public debt management, monetary policy and financial institutions

Despite the large size of the Brazilian debt market, as well the large diversity of its bonds, the picture that emerges is of a market that has not yet completed its transition from the role it performed during the megainflation years, namely that of providing a liquid asset that provided positive real returns. This unfinished transition is currently placing the market under severe stress, as fears of a possible default from the next administration grow larger. This paper analyzes several aspects pertaining to the management of the domestic public debt. The causes for the extremely large and fast growth ofthe domestic public debt during the seven-year period that President Cardoso are discussed in Section 2. Section 3 computes Value at Risk and Cash Flow at Risk measures for the domestic public debt. The rollover risk is introduced in a mean-variance framework in Section 4. Section 5 discusses a few issues pertaining to the overlap between debt management and monetary policy. Finally, Section 6 wraps up with policy discussion and policy recommendations.

Debt management in Brazil: evaluation of the Real Plan and challenges ahead

The Brazilian domestic debt has posed two challenges to policy-makers: it has grown very fast and its maturity is extremely short. This has prompted fears that a default or a compulsory lengthening scheme would be imposed. Here, we analyse the domestic public debt management experience in Brazil, searching for policy prescriptions for the next few years. After briefiy reviewing the recent domestic public debt history, we decompose the large rise in federal bonded debt during 1995-2000, searching for its macroeconomic causes. The main culprits are the extremely high interest payments-which, unti11998, were caused by the weak fiscal stance and the quasi-fixed exchange-rate regime; and since 1999, by the impact ofthe currency depreciation On the dollar-indexed and the externai debt-, and the accumulation of assets of doubtful value, much of which may have to be written off in the future. Simulation exercises of the net debt path for the near future underscore the importance of a tighter fiscal stance to prevent the debt-GDP ratio from growing further. Given the need to quickly lengthen the debt maturity, our main policy advice is to foster, and rely more on, infiation-linked bonds.

The asymmetric behavior of the U.S public debt

Our main goal in this paper was to measure how e¢ cient is risk sharing between countries. In order to do so, we have used a international risk sharIn this paper we re-analyze the question of the U.S. public debt sustainability by using a quantile autoregression model. This modeling allows for testing whether the behavior of U.S. public debt is asymmetric or not. Our results provide evidence of a band of sustainability. Outside this band, the U.S. public debt is unsustainable. We also nd scal policy to be adequate in the sense that occasional episodes in which the public debt moves out of the band do not pose a threat to long run sustainability.

Investment in human capital in a macrodynamic framework: redistributive taxation, public debt and welfare

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

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.

The contagion effect of public debt on monetary policy: the brazilian experience

This paper attempts to explain why the Brazilian inter-bank interest rate is so high compared with rates practiced by other emerging economies. The interplay between the markets for bank reserves and government securities feeds into the inter-bank rate the risk premium of the Brazilian public debt.

Public debt sustainability and endogenous seignorage in Brazil: time-series evidence from 1947-92

Using national accounts data for the revenue-GDP and expenditure GDP ratios from 1947 to 1992, we examine two central issues in public finance. First, was the path of public debt sustainable during this period? Second, if debt is sustainable, how has the government historically balanced the budget after hocks to either revenues or expenditures? The results show that (i) public deficit is stationary (bounded asymptotic variance), with the budget in Brazil being balanced almost entirely through changes in taxes, regardless of the cause of the initial imbalance. Expenditures are weakly exogenous, but tax revenues are not;(ii) a rational Brazilian consumer can have a behavior consistent with Ricardian Equivalence (iii) seignorage revenues are critical to restore intertemporal budget equilibrium, since, when we exclude them from total revenues, debt is not sustainable in econometric tests.

The asymmetric behavior of the U.S. public debt

In this paper we re-analyze the question of the U.S. public debt sustainability by using a quantile autoregression model. This modeling allows for testing whether the behavior of U.S. public debt is asymmetric or not. Our results provide evidence of a band of sustainability. Outside this band, the U.S. public debt is unsustainable. We also find fiscal policy to be adequate in the sense that occasional episodes in which the public debt moves out of the band do not pose a threat to long run sustainability.

Public debt sustainability and endogenous seigniorage in Brazil: time-series evidence from 1947-92: revised version

Using national accounts data for the revenue-GDP and expenditureGDP ratios from 1947 to 1992, we examine three central issues in public finance. First, was the path of public debt sustainable during this period? Second, if debt is sustainable, how has the government historically balanced the budget after shocks to either revenues or expenditures? Third, are expenditures exogenous? The results show that (i) public deficit is stationary (bounded asymptotic variance), with the budget in Brazil being balanced almost entirely through changes in taxes, regardless of the cause of the initial imbalance. Expenditures are weakly exogenous, but tax revenues are not; (ii) the behavior of a rational Brazilian consumer may be consistent with Ricardian Equivalence; (iii) seigniorage revenues are critical to restore intertemporal budget equilibrium, since, when we exclude them from total revenues, debt is not sustainable in econometric tests.

Public debt and the limits of fiscal policy to increase economic growth

Research that seeks to estimate the effects of fiscal policies on economic growth has ignored the role of public debt in this relationship. This study proposes a theoretical model of endogenous growth, which demonstrates that the level of the public debt-to-gross domestic product (GDP) ratio should negatively impact the effect of fiscal policy on growth. This occurs because government indebtedness extracts part of the savings of the young to pay interest on the debts of the older generation, who are no longer saving. Therefore, the payment of debt interest assumes an allocation exchange role between generations that is similar to a pay-as-you-go pension system, which results in changes in the savings rate of the economy. The major conclusions of the theoretical model were tested using an econometric model to provide evidence for the validity of this conclusion. Our empirical analysis controls for timeinvariant, country-specific heterogeneity in the growth rates. We also address endogeneity issues and allow for heterogeneity across countries in the model parameters and for cross-sectional dependence.

Comments on public debt indexation and denomination, the case of Brazil

In this work I analyze the model proposed by Goldfajn (2000) to study the choice of the denomination of the public debt. Some potential shortcmomings of the mo dei in explaining the data are discussed. Measures of the overestimation of the welfare gains of reducing distortions from taxation, under the model's simplified time frame, are also provided. Assuming a time-preference parameter of 0.9, for instance, welfare gains associated with a hedge to the debt that reduces to half a once-for-all 20o/o-of-GDP shock to governemnt 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.

Rational expectations and the service of public debt: a recursive approach

This paper uses dynamic programming to study the time consistency of optimal macroeconomic policy in economies with recurring public deficits. To this end, a general equilibrium recursive model introduced in Chang (1998) is extended to include govemment bonds and production. The original mode! presents a Sidrauski economy with money and transfers only, implying that the need for govemment fmancing through the inflation tax is minimal. The extended model introduces govemment expenditures and a deficit-financing scheme, analyzing the SargentWallace (1981) problem: recurring deficits may lead the govemment to default on part of its public debt through inflation. The methodology allows for the computation of the set of alI sustainable stabilization plans even when the govemment cannot pre-commit to an optimal inflation path. This is done through value function iterations, which can be done on a computeI. The parameters of the extended model are calibrated with Brazilian data, using as case study three Brazilian stabilization attempts: the Cruzado (1986), Collor (1990) and the Real (1994) plans. The calibration of the parameters of the extended model is straightforward, but its numerical solution proves unfeasible due to a dimensionality problem in the algorithm arising from limitations of available computer technology. However, a numerical solution using the original algorithm and some calibrated parameters is obtained. Results indicate that in the absence of govemment bonds or production only the Real Plan is sustainable in the long run. The numerical solution of the extended algorithm is left for future research.

Debt maturity determinants in Brazil: evidence from private and public corporate borrowings

This study provides an empirical investigation of the determinants of long-term debt maturity in Brazil. We built a unique database that includes privately placed debt and public debt for 308 publicly traded, non-financial Brazilian companies, from 2009 to 2013. We perform GMM panel analyses using as dependent variables the amount of long-term debt payable in more than one, three, and five years for total debt, BNDES (Brazilian Development Bank) debt and corporate bonds. The results show that the BNDES finances less risky firms, i.e., those that are larger, older, more tangible and more transparent. We also find support for information asymmetry theories, as companies with higher transparency levels have similar leverage levels relative to others but higher proportions of long-term debt in their capital structures. Regarding debt levels, we find that more levered companies are larger, less profitable, more tangible and have fewer growth opportunities. To our knowledge, this is the first paper to address the determinants of long-term debt maturity in Brazil that uses various specifications of long-term debt and that examines different types of debt.

Debt ceiling and fiscal sustainability in Brazil: a quantile autoregression approach

In this paper we investigate fiscal sustainability by using a quantile autoregression (QAR) model. We propose a novel methodology to separate periods of nonstationarity from stationary ones, which allows us to identify various trajectories of public debt that are compatible with fiscal sustainability. We use such trajectories to construct a debt ceiling, that is, the largest value of public debt that does not jeopardize long-run fiscal sustainability. We make out-of-sample forecast of such a ceiling and show how it could be used by Policy makers interested in keeping the public debt on a sustainable path. We illustrate the applicability of our results using Brazilian data.

Ensaios em macroeconometria e finanças

This thesis is composed of three essays referent to the subjects of macroeconometrics and Önance. In each essay, which corresponds to one chapter, the objective is to investigate and analyze advanced econometric techniques, applied to relevant macroeconomic questions, such as the capital mobility hypothesis and the sustainability of public debt. A Önance topic regarding portfolio risk management is also investigated, through an econometric technique used to evaluate Value-at-Risk models. The Örst chapter investigates an intertemporal optimization model to analyze the current account. Based on Campbell & Shillerís (1987) approach, a Wald test is conducted to analyze a set of restrictions imposed to a VAR used to forecast the current account. The estimation is based on three di§erent procedures: OLS, SUR and the two-way error decomposition of Fuller & Battese (1974), due to the presence of global shocks. A note on Granger causality is also provided, which is shown to be a necessary condition to perform the Wald test with serious implications to the validation of the model. An empirical exercise for the G-7 countries is presented, and the results substantially change with the di§erent estimation techniques. A small Monte Carlo simulation is also presented to investigate the size and power of the Wald test based on the considered estimators. The second chapter presents a study about Öscal sustainability based on a quantile autoregression (QAR) model. A novel methodology to separate periods of nonstationarity from stationary ones is proposed, which allows one to identify trajectories of public debt that are not compatible with Öscal sustainability. Moreover, such trajectories are used to construct a debt ceiling, that is, the largest value of public debt that does not jeopardize long-run Öscal sustainability. An out-of-sample forecast of such a ceiling is also constructed, and can be used by policy makers interested in keeping the public debt on a sustainable path. An empirical exercise by using Brazilian data is conducted to show the applicability of the methodology. In the third chapter, an alternative backtest to evaluate the performance of Value-at-Risk (VaR) models is proposed. The econometric methodology allows one to directly test the overall performance of a VaR model, as well as identify periods of an increased risk exposure, which seems to be a novelty in the literature. Quantile regressions provide an appropriate environment to investigate VaR models, since they can naturally be viewed as a conditional quantile function of a given return series. An empirical exercise is conducted for daily S&P500 series, and a Monte Carlo simulation is also presented, revealing that the proposed test might exhibit more power in comparison to other backtests.