Public debt in Brazil: Sustentability and its implications

This paper tests sustainability of Brazilian public debt in the period 1991 to 2009, and analyzes implications of requiring that the Brazilian fiscal policy be primarily committed to the sustainability of the public debt. The retrospective analysis utilizes a set of unit root tests and avoids some of the criticism leveled at previous studies by using data which has not previously been used for this purpose, and concludes that the public debt was sustainable in the period we consider. The prospective analysis is based on the DSGE model proposed by Jodi Galí et al. (2007) calibrated for Brazil, using the conclusions of the retrospective analysis for the fiscal parameters. The scenarios produced with the help of the model show that maintaining the sustainability of the public debt is consistent with the monetary policy of inflation targeting. We also conclude that it is possible to reduce interest rates to levels below those prevalent at the end of 2010 simultaneously maintaining the stability of the trajectory of the public debt.