Working Paper: NBER ID: w9211
Authors: Assaf Razin; Efraim Sadka
Abstract: We develop a model that captures important features of debt crises of the Brazilian type. Its applicability to Brazil lies in the fact that (1) in Brazil the macro fundamentals were sound (e.g., a primary surplus, a relatively low debt/GDP ratio, etc.); and (2) in the Brazilian case the trigger appears to be the forthcoming elections, with an expected regime change.
Keywords: Brazil; debt crisis; macroeconomics; political economy
JEL Codes: F1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Brazil's macroeconomic fundamentals (N16) | good equilibrium (D50) |
| good equilibrium (D50) | favorable credit ratings (G21) |
| favorable credit ratings (G21) | risk premium (G19) |
| forthcoming elections (K16) | shift from good equilibrium to bad equilibrium (D59) |
| shift from good equilibrium to bad equilibrium (D59) | high public debt service (H63) |
| shift from good equilibrium to bad equilibrium (D59) | poor growth prospects (E66) |
| changes in market expectations about creditworthiness (E44) | reduced investment (G31) |
| changes in market expectations about creditworthiness (E44) | increased fiscal deficits (H69) |
| country-specific risk premium (F29) | interest rate faced by firms (E43) |
| aggregate investment levels (E10) | country-specific risk premium (F29) |