The federal domestic debt and state governments: the impact of the state debts on the federal government finances

Abstract

This paper investigates how the finances of the Brazilian federal government responded to innovations in the debts of the most indebted states, Sao Paulo, Minas Gerais, Rio de Janeiro and Rio Grande do Sul. Using monthly data from 1981 to 1998, a vector autoregression system (VAR) is estimated to investigate the relationship between the federal government finances and the state debts. Results have indicated that state debts are relatively important to the forecast of the federal domestic debt when compared to the impact of a shock to government expenditures or tax revenues, but the effect of the state debts on the federal debt is very small when compared to the effects of a shock to the real interest rate.