Abstract

MARQUETTI, Adalmir; SILVA, Carlos Schonerwald da  and  VERNENGO, Matías. Foreign, exchange, interest and the dynamics of public debt in Brazil. Inv. Econ [online]. 2010, vol.69, n.271, pp.81-98. ISSN 0185-1667.

This paper analyzes the interaction between exchange rate, interest rate, and monetary policy in Brazil. Higher rates of interest lead to an increase in the financial burden of debt, and as a result to an increase in budget deficits. Also, high rates of interest attract capital inflows, leading to an appreciation and a reduction of the payments on debt in domestic currency. The net effect of higher rates of interest on public debt depends on the relative strength of both effects. Our analysis shows that, under specific conditions regarding the size of pass-through effects and the elasticity of public debt to changes in the rate of interest, the control of the exchange rate allows controlling both inflation and the debt-to-GDP ratio.

Keywords : exchange rate; interest rate; public debt; monetary policy.