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Public debt indexation and denomination, the case of Brazil: a comment
Author(s) -
Cysne Rubens Penha
Publication year - 2007
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.334
Subject(s) - economics , debt , consumption (sociology) , indexation , government debt , consumption smoothing , shock (circulatory) , econometrics , inflation (cosmology) , hedge , welfare , point (geometry) , monetary economics , macroeconomics , business cycle , monetary policy , medicine , social science , ecology , market economy , physics , geometry , mathematics , sociology , biology , theoretical physics
In this work I analyse the model proposed by Goldfajn to study the choice of the denomination of the public debt. The main purpose of the analysis is to point out possible reasons why new empirical evidence provided by Bevilacqua et al ., regarding a more recent time period, gives less empirical support to the model. I also provide a measure of the overestimation of welfare gains from hedging the debt caused by the simplified time frame of Goldfajn's model. Assuming a time‐preference parameter of 0.9, for instance, consumption gains associated with a hedge to the debt that reduces by half a one‐time 20%‐of‐GDP shock to government spending run around 1.43% under the no‐tax‐smoothing structure of the model. Under a Ramsey allocation, though, consumption increases by just 0.05%. Copyright © 2007 John Wiley & Sons, Ltd.