Fiscal dominance and risk premiun in Brazil

Dominância fiscal e prêmio de risco no Brasil

Marcio José Szpaki Zaparolli () and Carlândia Brito Santos Fernandes ()

Estudios Economicos, 2024, vol. 041 (Nueva Serie), issue 82, 189-221

Abstract: The aim of this paper was to verify whether the Brazilian economy was under fiscal dominance in the years 2015 and 2016, during the period of the downgrade of Brazil's rating and the presidential impeachment process. We applied the model proposed by Blanchard (2004), studying the effect of an increase in domestic interest rate on the exchange one. The empirical analysis considered the movements in the capital flow and risk premium derived from the greater public indebtedness expectation. The results show that the increase causes a movement contrary to what was expected, depreciating the exchange rate given the relationship between the expected public debt and the probability of default, jeopardizing the inflationary control and confirming the fiscal dominance hypothesis

Keywords: default risk; fiscal dominance; inflation; monetary policy; risco de default; dominância fiscal; inflação; política monetária (search for similar items in EconPapers)
JEL-codes: E63 H30 H62 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:uns:esteco:v:41:y:2024:i:82:p:189-221

DOI: 10.52292/j.estudecon.2024.3022

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