This paper investigates how the Brazilian federal domestic debt responded to innovations in fiscal and financial components of the government's budget constraint. Using monthly data from 1981:01 to 1996:12, a parsimonious model is selected to describe the federal domestic debt and a vector autoreregression system (VAR) is estimated to investigate the relationship between the debt and the other variables in the budget constraint. The results indicate that the financial components of the budget (real interest rate and inflation) are relatively more important than the fiscal ones (government expenditures and tax revenues) in contributing to the federal domestic debt dynamics.
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