Public debt sustainability and endogenous seigniorage in Brazil: time-series evidence from 1947-1992

Abstract

In this paper, we investigate three central issues in public finance. First, was the path of public debt sustainable during 1947-1992? Second, how has the government balanced the budget after shocks to either revenues or expenditures were observed? Third, are expenditures exogenous? The results show that (i) debt is sustainable in econometric tests, with the budget being balanced almost entirely through changes in taxes, regardless of the cause of the initial imbalance. Expenditures are weakly exogenous; (ii) the behavior of a 'rational' Brazilian consumer may be consistent with Ricardian Equivalence; (iii) seigniorage revenues are critical in restoring intertemporal budget equilibrium. (C) 2000 Elsevier Science B.V. All rights reserved. JEL classification: H6: H3; C3.