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.