Sovereign Domestic Debt Management under Fiscal Deterioration: the Brazilian Case

Advisor: Márcio Garcia

Co-advisor: Yvan Becard

This dissertation studies the effects of the fiscal stance on the composition of public debt in the short run. We use data on Brazilian public debt issuance and assess the impact of fiscal deficits and sovereign risk on the share of shortterm debt through reduced-form and VAR methods. Our results suggest that a fiscal deterioration is associated with a higher share of short-term debt. At the same time, a sovereign risk shock increases the reliance on short-term and floating-rate debt. Then, in order to disentangle supply and demand factors in public debt issuance, we estimate the interest-rate elasticity in auctions for short- and medium-term public debt. Using a method of identification through heteroskedasticity, we find that both factors are present. However, market demand is considerably more interest-rate elastic than Treasury supply.