TY  - JOUR
AU  - Favero,Carlo A.
AU  - Giavazzi,Francesco
TI  - Inflation Targeting and Debt: Lessons from Brazil
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10390
PY  - 2004
Y2  - March 2004
UR  - http://www.nber.org/papers/w10390
L1  - http://www.nber.org/papers/w10390.pdf
N1  - Author contact info:
Carlo Favero
Department of Finance
Bocconi University and IGIER
Via Röntgen, 1
20136 Milano, ITALY
E-Mail: carlo.favero@uni-bocconi.it

Francesco Giavazzi
Universita' Bocconi and IGIER
Via Guglielmo Rontgen, 1
Milan 20136
ITALY
Tel: 0039-02-5836-3304
Fax: 0039-02-5836-3302
E-Mail: francesco.giavazzi@unibocconi.it
AB  - Studying the recent experience of Brazil the paper explains how default risk is at the centre of the mechanism through which an emerging market central bank that targets inflation might lose control of inflation--in other words of the mechanism through which the economy might move from a regime of 'monetary dominance' to one of 'fiscal dominance'.  The literature, from Sargent and Wallace (1981) to the modern fiscal theory of the price level has discussed how an unsustainable fiscal policy may hinder the effectiveness of monetary policy, to the point that an increase in interest rates can have a perverse effect on inflation. We show that the presence of default risk reinforces the possibility that a vicious circle might arise, making the fiscal constraint on monetary policy more stringent.
ER  -