We modify the Cole and Kehoe model by including domestic debt. According to the original model, a speculative attack on a high debt level issued abroad triggers external debt default. Here, it is possible to inflate away the domestic debt to avoid the external debt default. We consider two...

The paper analyzes nominal yields of five-year fixed-rate Brazilian Domestic Federal Public Debt (DFPD) bonds in response to fluctuations in international net capital flows to Brazil for the period January 2007 to July 2012. The results show that estimation in differences with error correction...