An SFC model on Brazil

José Luis Oreiro gave me the link to this paper

Public Debt Management in a Dynamic Stock-Flow Consistent Model: Implications for the Brazilian case
Authors: Breno Santana Lobo – José Luis Oreiro

The existence of floating-rate bonds in the composition of public debt is associated with some factors that tend to negatively affect the trajectory of the economy over time. The main objective of this article is to analyze the changes caused by a change in the public debt composition over the dynamics of a given economy. In order to do that , we built a dynamic stock-flow consistent post-keynesian model, in which the government bond market is modeled to reflect the main features of the Brazilian case. The parameters and initial conditions of the model are calibrated in order to form a baseline scenario that reflects in a satisfactory way the main stylized facts of modern economies. The simulation results indicate that the extinction of floating-rate bonds does not have negative effects on the economy in the short run. In the long run, however, uncontrolled public spending due to an increase in the debt service takes the economy to a path of instability. To stabilize the economy, government should adjust its economic policy to its debt management policy. Fiscal policy, monetary policy and income policy may be used by the government. A restrictive fiscal policy can be useful to stabilize the economy. However, it is associated with smaller growth rates. An active fiscal policy, associated with some specific objective, can reverse this result, suggesting that the fiscal policy can contribute to control inflation. Restrictive monetary policy can also be used to stabilize the economy. However, it is not the best policy to control inflation. Income policy has the best results.

Leave a Reply