Escaping the Debt Constraint on Growth

Existing interest rates imply explosive debt dynamics for Brazil. Brazil also faces rising inflation from earlier currency depreciations, which could trigger future depreciation. These conditions impose a policy contradiction. Brazil needs lower interest rates for debt sustainability and growth, but tight monetary policy to avoid exchange rate depreciation and inflation. The paper develops a strategy to escape this contradiction. Policy must bolster investor confidence to lower external interest rates, lower domestic interest rates to reduce debt service burdens, and implement domestic credit creation controls to control inflation.

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