HAVE WE REALLY “RUN OUT OF MONEY”? INTEREST RATES AND THE FINANCING OF PUBLIC EXPENDITURES IN A SOVEREIGN CURRENCY COUNTRY

ABSTRACT

This paper discusses the financing of public expenditures and the determination of interest rates on short and long public bonds in a country that has monetary sovereignty. The analysis follows the exogenous interest rate approach that combines the notions of endogenous money of modern monetary theory and of functional finance from Lerner. Focusing particularly in the case of Brazil, the paper begins with the analysis of the operational procedures of government financing and the relationship between Treasury and the Central Bank, the relationship between government financing and the short and long term interest rates on public bonds. As a country (not just the public sector) can indeed go bankrupt in terms of foreign currency, this is followed by the analysis of the “sovereign risk” spread and its relationship with the external liabilities in foreign currency of the country (and not of the public sector) and a brief discussion of the relationship between the spread and the ratings of the international agencies. We conclude by very succinctly pointing out some implications of the above analysis to the recent discussion in Brazil (since 2015) on the need of a major “fiscal adjustment”.

KEYWORDS:
interest rates; functional finance; endogenous money