Public debt maturity structure in Brazil: a Stock-Flow Consistency (SFC) analysis

Abstract

This dissertation investigates the impacts and dynamics of government debt maturity structure within Brazil's institutional framework. To accomplish that, a Stock-Flow Consistent (SFC) model that reproduces in a stylized manner the Brazilian institutional framework regarding supply and demand for federal government bonds is built to explicit debt maturities dynamics, producing endogenous cyclical behavior. As far as we are aware, explicitly accounting for debt maturities is an original contribution to SFC literature. The model is used to assess the secondary effects of three key policy shocks: (i) monetary policy changes – a cut (or increase) in monetary policy rate; (ii) fiscal expansion or contraction through government expenditure; (iii) fiscal loosening or tightening through tax rate changes. We also analyze a shock on bondholders’ portfolio choice sensitivity parameter. Additionally, we compare debt-to-GDP dynamics under alternative scenarios for initial maturity structure. The results show that monetary policy shocks only affect the price of bills, without impacting real economic variables or debt; accelerating government spending lowers debt-to-GDP ratio, while tax rate cuts raise debt-to-GDP ratios, and altering bondholder’s sensitivity to bill’s return are neutral. Overall results indicate that explicitly accounting for debt maturities introduces significant volatility to the system, even considering a stable private sector demand for government bills and central bank as a last-resort buyer for excess government debt. This aspect renders the modelling appropriate for analyzing emerging market economies whose maturities structures play an important role in government borrowing needs.