Abstract

The Brazilian public sector disequilibrium, as measured by growth in the global
net public sector debt to GDP ratio, is examined with and without the “Plano Cruzado”.
Two models are used, one based upon a discrete time framework and the other based upon a
continuous time framework, to trace paths of the debt-GDP ratio for the rest of the decade
concentrating on the 1985-1990 period. Two major conclusions are reached. The first, of a
theoretical nature, is that discrete-time models are inappropriate in an inflationary context
as they severely underestimate the inflation tax. The second is that the Plano Cruzado may
put strong pressure on government finances due to the drastic fall in the inflation tax.

JEL Classification: H63; E31.