FINANCIAL INDEXATION AND PROCYCLICAL BEHAVIOR OF BRAZILIAN PUBLIC DEBT

Abstract

The paper discusses the relationship between financial indexation (existence of treasury bonds indexed to short-term interest rate, with high liquidity) and procyclical behavior of Brazilian public debt – the sensibility of indexed parcel of DPMFi to Selic to effective and expected changes of Selic, with particular attention to the period after the establishment of the inflation targeting system. Through a Vector Error Correction Model (VECM), it is argued that the indexation of much of the public debt to Selic decrease the autonomy in public debt management, because changes in the Selic, or variables that signalize its elevation, increase the participation of treasury bonds indexed to Selic.