Is foreign-currency indexed debt a commitment technology? Some evidence from Brazil and Mexico

William Gruben and Darryl McLeod ()

No 299, Center for Latin America Working Papers from Federal Reserve Bank of Dallas

Abstract: We examine the effects of foreign currency-indexed debt upon inflationary expectations in Brazil and Mexico. Conjecturing that markets will view increasing overhangs of foreign currency-indexed debt as a commitment technology that fiscally punishes devaluation, we test whether increasing such overhangs will attenuate the effect of monetary growth upon inflationary expectations. We find some econometric confirmation of these conjectures in both the Brazilian and Mexican cases. Finding that the results are consistent with the notion that increasing the share of dollar indexed debt may also permit some temporary monetary independence even under pegged exchange rate regimes, we present some evidence of independent policy behavior during periods when are model results would suggest it. ; Economic Research Working Paper 9913

Keywords: Money; Brazil; Debt; Financial crises - Latin America; Indexation (Economics); Inflation (Finance); Mexico (search for similar items in EconPapers)
Date: 1999
New Economics Papers: this item is included in nep-ifn and nep-pke
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