The effect of monetary and fiscal credibility on public debt: empirical evidence from the Brazilian economy

ABSTRACT

This study relates to the literature regarding credibility effect on public debt for developing economies under inflation targeting. The novelty is the investigation of effects of both monetary and fiscal credibility on public debt and its management. The main idea is that high credibility might improve public debt management. With this purpose, this paper addresses empirical evidence based on the Brazilian experience. The findings denote that credibility is an important instrument to improve the public debt management under inflation targeting.

KEYWORDS:

• Public debt
• fiscal credibility
• monetary credibility
• inflation targeting

JEL CLASSIFICATION:

• E62
• E63

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ For examples of the use of this credibility index and its variations in the literature, see de Mendonça and Tostes (2015), Montes (2013), and de Mendonça and de Guimarães e Souza (2009).

² For examples of applications of this index, see de Mendonça and Tostes (2015), Kanoun (2014), and Rutkauskas, Stasytytė, and Maknickienė (2014).

³ See de Mendonça and Machado (2013) and Anderson, Silva, and Velandia-Rubiano (2010).

⁴ Tests regarding unit root, specification, heteroscedasticity, and autocorrelation are available upon request to the authors.

⁵ The variable DEBT was not considered in the models in order to eliminate the risk of simultaneity bias.