Macroeconomic coordination and commercial integration in MERCOSUR

Commercial integration in the Mercosur area has increased substantially in the last few years and it is expected to continue to grow rapidly in the near future. However, given the historical record of policy management in the region, especially in Brazil and Argentina, the main partners of this integration initiative, it is not clear whether macroeconomic policies will provide the required conditions of sustainability for such a rapid trade expansion. This paper discusses the relationship between macroeconomic coordination and commercial integration in the context of Mercosur. After examining the impact of policy instability on trade flows within the region in recent years, it evaluates the prospects for closer coordination of macroeconomic policies in the future.

State-government bailouts in Brazil

As a result of the consolidation of the democracy after the end of the military regime in the mid-1980s, Brazil has gone through a period of remarkable decentralization both in fiscal and political terms. The move towards decentralized management and control of public finances has been followed by a series of bailouts of state governments by the federal government. The lack of effective control on borrowing, coupled with reputational effects originating from these repeated bailout operations, reduced fiscal discipline and created an explosive accumulation of debts in Brazilian states during the last decade. The main purpose of this paper is to assess the determinants of state debt bailouts in Brazil and their relationship with states’ fiscal discipline during the 1990s. After providing a brief overview of intergovernmental fiscal relationships in the Brazilian economy, the paper describes state debt developments from the mid-1980s on, with special emphasis on the 1989, 1993 and 1997 state debt bailouts. Then it discusses the determinants of state debt bailouts in Brazil along the lines of a conceptual framework which recognizes that the essence of the bailout question is the issue of moral hazard and also presents empirical evidence that the occurrence of bailouts is associated with lower fiscal discipline in Brazilian states during the 1990s.

Fiscal impulse in the Brazilian economy

This paper develops an alternative indicator of fiscal policy which allows a more accurate picture of the underlying fiscal trend in the Brazilian economy over the recent period. This indicator corrects conventional fiscal-stance measures for the effects of theeconomic cycle, and yields a measure of the discretionary change in the budgetary position of the public-sector, known as the fiscal impulse. Section 2 briefly examines the evolution of traditional fiscal policy indicators over the recent period, detecting the bottom line of the changes in the fiscal stance. The details of the estimation of the fiscal impulse measure for the Brazilian economy are presented in Section 3. Section 4 concludes the paper with a reassessment of recent fiscal policy episodes, using the data generated in the previous section. The resulting fiscal-impulse measure indicates that, on average, the fiscal stance during 1989-96 was more expansionist than suggested by traditional fiscal policy indicators.

Delaying Public Sector Reforms: Post-Stabilization Fiscal Strains in Brazil

Since the mid-1980s Brazil has experienced a period of great macroeconomic instability. Examining the evolution of the primary balance during these years, one identifies three markedly distinct periods: 1985 to 1989, 1990 to 1994, and 1995-96. The average primary surplus increased from 0. 6 percent of GDP in 1985-89, to 3. 1 percent in 1990-94, falling back to less than 0. 1 percent of GDP in 1995-96. The reduction in the operational deficit between 1985-89 and 1990-94 reached almost 5. 5 percent of GDP, with more than half of the improvement coming from falling interest payments. Between 1990-94 and 1995-96, the operational deficit widened by 4. 5 percent of GDP. Only less than a third of that variation may be attributed to rising interest payments. All the rest came from the vanishing primary surplus.

State Government Bailouts in Brazil

As a result of the consolidation of democracy after the end of the military regime in the mid-1980s, Brazil has gone through a period of remarkable decentralization both in fiscal and political terms. The move towards decentralized management and control of public finances has been followed by a series of bailouts of state governments by the federal government. The lack of effective control on borrowing, coupled with reputational effects originating from these repeated bailout operations, reduced fiscal discipline and created an explosive accumulation of debts in Brazilian states during the last decade. The main purpose of this paper is to assess the determinants of state debt bailouts in Brazil and their relationship with states’ fiscal discipline during the 1990s. After providing a brief overview of intergovernmental fiscal relationships in the Brazilian economy, the paper describes state debt developments from the mid-1980s on, with special emphasis on the 1989, 1993 and 1997 state debt bailouts. The paper subsequently discusses the determinants of state debt bailouts in Brazil along the lines of a conceptual framework that recognizes that the essence of the bailout question is the issue of moral hazard, then presents empirical evidence that the occurrence of bailouts is associated with lower fiscal discipline in Brazilian states during the 1990s.

The Structure of Public Sector Debt in Brazil

The literature on the end of remarkable inflationary processes (Bresciani-Turroni, 1937; Sargent, 1986) calls our attention to one of the favorable aspects of hyperinflations: the fact that high inflation destroys old debts. Because of the central role fiscal deficits play in chronic inflation, the alleviation of the debt burden helps stabilization, and the fact that a large portion of government debt may disappear without the undesirable reputation costs of explicit debt repudiation is even better. In the Brazilian inflationary experience, most of this potentially favorable effect of high inflation on debt has been neutralized by indexation. In December 1994, officially recognized total federal domestic debt was 19. 9% of GDP. The fast growth of public debt in the first four years of stabilization has offset the benefits of the inflation acceleration, which occurred shortly before the onset of monetary reform in July, 1994. By December 1998, this figure was 44. 8% of GDP.

Public sector debt dynamics in Brazil

1. INTRODUCTION 2. POLICY MIX AND THE PUBLIC-SECTOR NET DEBT 3. SKELETONS IN THE CLOSET, PRIVATIZATION PROCEEDS AND SEIGNIORAGE 4. SIMULATING DEBT DYNAMICS 5. SENSITIVITY ANALYSIS 6. CONCLUDING REMARKS APPENDIX: THE SIMULATION MODEL

Brazil: taming inflation expectations

This paper analyzes monetary policy implementation and convergence of inflation and inflation expectations to the targets in Brazil after the crisis in 2002. It covers the initial disinflation and subsequent economic recovery, followed by the inflation rebound and corresponding policy response, and finally the consolidation of disinflation in 2005-06. Monetary policy implementation and the overall improvement in macroeconomic fundamentals have contributed substantially to create a more stable and predictable environment, evidenced by signs of reduction in inflation uncertainty. Furthermore, econometric exercises indicate the critical role played by the targets as attractors for inflation expectations.

Banks, domestic debt intermediation and confidence crises: the recent Brazilian experience

This paper examines the recent evolution of the Brazilian public domestic debt and interprets it in light of the confidence crisis literature. The analysis of the recent developments in the Brazilian public domestic debt market shows that the likelihood of a default must not be assessed only using simple summary aggregate measures of public domestic debt size and maturity, but must also take into consideration other structural aspects. Our analysis emphasizes the two main pillars of the Brazilian public domestic debt market: home-bias and the role of the banking sector in intermediating the debt. Evidence from yields of a perfectly indexed bond shows that the rollover premium was very small when the devaluation occurred, and is still fairly small by October, 1999, indicating that the rollover of the public domestic debt has not, so far, constituted a serious problem. Positive prospects for the public domestic debt market will depend, however, on the Brazilian government maintaining the current fiscal austerity program.

Official Creditor Seniority and Burden-Sharing in the Former Soviet Bloc

macroeconomics, Soviet bloc, burden-sharing, official creditor seniority