A Benchmark for Public Debt : The Brazilian Case

Public debt management has gained prominence over the last years. The pursuit of an adequate public debt composition is critical to the objective of minimizing long term financing costs, while ensuring the maintenance of prudent risk levels. In this sense, we devise a benchmark for the public debt, defined as a long term, optimal debt structure, to serve as a guide for short and medium term borrowing strategies. The proposed benchmark builds on stochastic finance methods to construct an efficient frontier for public debt. Such a frontier indicates which debt compositions are efficient from a cost/risk trade-off standpoint. In short, this paper aims at formulating a consistent theoretical public debt benchmark model, thus creating the possibility of choosing an optimal debt composition to serve as a guide for public debt management decisions. For those interested in the history of debt management practices in Brazil, we present in the appendix an account of its institutional evolution and tools used, of which the benchmark is the latest addition