Public debt dynamics in Brazil through the lens of its conditioning factors

Abstract

ABSTRACT This article aims to investigate the short and long-run behaviour of the Brazilian public debt, through the lens of the conditioning factors, from December/2006 to September/2022. The econometric approach consists of estimating Nonlinear Autoregressive Distributed Lag Models (NARDL) – Bounds Testing Approach to Cointegration. The main empirical results show: i) a long-term relationship (cointegration) between net and gross debt and their respective conditioning factors; ii) higher speed of adjustment to long-run equilibrium for the gross debt (20%), due to exchange rate adjustments and its asset-only approach; iii) slow net debt adjustment due to its asset-liability consolidation; iv) accumulation foreign reserves closely related to the response given by the gross debt, when affected by exchange rate shocks; iv) the search for a balance in public accounts seems to be a good strategy, as shown by the relationship between primary results/net issuance and net/gross debt; v) an economic activity expansion helps control public debt in Brazil, with a greater sensitivity of the gross debt, compared to the net debt; vi) the role played by the Brazilian Central Bank, together with the accumulation of foreign reserves, is crucial to understanding the recent differences in the trajectories of net and gross debt in Brazil.