The behavior of the Brazilian federal domestic debt

This paper analyses the sustainability of the Brazilian federal fiscal policy by examining the responses of the government budget surplus to variations of the debt-GDP ratio. The approach to assess sustainability, originally proposed by Bohn (1998), circumvents the problems present in traditional sustainability tests based on statistical properties of the debt, such as unit roots and cointegration. In particular, the regressions proposed do not require restrictive assumptions about real interest rates, the structure of the government debt or the agents’ behavior towards risk. Using annual data from 1966 to 2000, the results have indicated that the government surplus has not systematically responded to changes in the debt-income level previously observed, indicating that the fiscal policy cannot be considered sustainable during the period analyzed. Moreover, it is shown that the debt-GDP ratio does not exhibit a mean-reverting tendency even when one controls for cyclical variations in income and government expenditures, further indicating a non-sustainable path for the fiscal policy.