Barbosa, F. H. (2006) “The Contagion Effect of Public Debt on Monetary Policy: the brazilian experience”. Brazilian Journal of Political Economy, Vol. 26, N.2, pp. 231-238.
This paper addresses a problem that is rather peculiar to the Brazilian
monetary policy environment: the interplay between monetary policy and public
debt management policy. This interrelation helps one to understand the reasons
why the basic rate of interest of the economy, the SELIC overnight rate of interest
for Central Bank funds is so high in real terms. The hypothesis presented in this
paper is that the contagion effect of public debt on monetary policy changes the
term structure of interest rates, e.g., the slope of the yield curve becomes flatter
as shown in Figure 1.
The goal of this paper is not to give a fully articulated answer of how to
disentangle, in the short run, the Central Bank reserves interest rate from the
treasury bill interest rate, because I do not have one, but just to raise some questions
that could be helpful to provide solutions that can improve the operational
procedures of the Brazilian Central Bank.