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A Brazilian-Type Debt Crisis Assaf Razin and Efraim Sadka Full Text of this Article (PDF 75K) Abstract: This paper develops a model that captures important features
of debt crises of the Brazilian type. Its applicability to Brazil lies in the
facts that (1) macroeconomic fundamentals were relatively sound in the wake
of the crisis (e.g., a nonnegligible primary surplus, a relatively low debt-GDP
ratio, and low inflation); and (2) the trigger for the crisis—forthcoming
elections with an expected regime change—appears to be extraneous. We
rationalize the sort of circularity involved in a country's credit rating.
In particular, we show how country credit ratings could bring about unstable
macroeconomic behavior, and explore the implications of such behavior for fiscal
policy. |
