Public debt and risk premium: An analysis from an emerging economy

Abstract

Purpose

This analysis seeks to deal with the emerging economies and to reveal that, if the fiscal authority is accountable with a policy that stabilizes the public debt/GDP ratio, the consequence is a low Treasury bond risk premium.

Design/methodology/approach

Based on the purpose of this paper, a theoretical model is developed and empirical evidence through an autoregressive distributed lag (ADL) model, taking into account the Brazilian experience, is made.

Findings

The findings denote that domestic variables are responsible for determining the risk premium. Moreover, a correct management of the public debt and the use of primary surplus targets make for a good strategy for promoting a fall in the Treasury bond risk premium.

Practical implications

Primary surplus and public debt/GDP ratio can be used as important tools for mitigating the Treasury bond risk premium.

Originality/value

The results of the paper give some new insights about the management of fiscal policy for developing countries.

Citation

Ferreira de Mendonça, H. and Pereira Duarte Nunes, M. (2011), "Public debt and risk premium: An analysis from an emerging economy", Journal of Economic Studies, Vol. 38 No. 2, pp. 203-217. https://doi.org/10.1108/01443581111128424