Abstract

Starting from the consolidated government budget constraint it is possible to illuminate
a number of issues concerning Brazil’s current economic situation. The main conclusions
that emerge from the analysis are that the fiscal imbalance will require a substantial
increase in the government’s debt in real terms and that the impact of this increase on interest
rates may have perverse explosive intertemporal consequences. We then discuss and dismiss
the “new (external) money” solution for the problem, arguing that Brazil does not face
a foreign exchange problem, but a domestic budgetary problem. The debt-service transfer
is being made, but not by the principal debtor, the government. The private sector pays the
external bill for the government and becomes the government’s creditor domestically. In the
long run, to obtain simultaneous external and internal balance Brazil will have to solve the
internal budgetary problem.

JEL Classification: H62; H63.