In this paper we study the question of debt sustainability from a risk management perspective. The debt accumulation equation for any country involves variables that are stochastic and closely intertwined. When these aspects are taken into consideration the notion of debt sustainability is expanded to studying the stochastic properties of the debt dynamics. We illustrate the methodology by studying the Brazilian case. We find that even though the debt could be sustainable in the absence of risk, there are paths in which it is clearly unsustainable. Furthermore, we show that properties of the debt dynamics are closely related to the spreads on sovereign dollar denominated debt.

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Highlights Brazil has actively experimented with capital controls since 2009.  Controls succeeded in segmenting the Brazilian and international financial markets.  First several measures did not substantially affect the exchange rate.  But exchange rate strongly depreciates after three last restrictions imposed.  Cumulative effect of measures considered depreciated the BRL by about 10%. Abstract A large theoretical literature emerged in recent years analyzing the positive and normative effects of capital controls, begging for empirical studies to validate it. No emerging market experimented as Economics, PUC-Rio, mgarcia@econ.puc-rio.br . The views expressed are those of the authors and should not be attributed to the IMF or any other institution. We thank BM&FBovespa for data; many traders for enlightment of the pratical implications of the controls; actively with capital controls as Brazil did during the aftermath of the 2008 crisis, when foreign capital poured in emerging markets. We analyze the impact of the capital controls that Brazil adopted since late 2009. These policies had some success in segmenting the Brazilian from global financial markets, as measured by the spread between onshore and offshore dollar interest rates, as well as ADR premium relative to the underlying local stocks. The measures adopted from late 2009 to mid-2011 did not translate into significant changes in the exchange rate, suggesting limited success in mitigating exchange rate appreciation. However, the exchange rate strongly depreciates after a tax on the notional amount of derivatives is adopted in mid-2011. The last of the three restrictions studied may have depreciated the Brazilian real in the range from 4 to 10 percent. That strong response may have been driven by complementarities with the previous measures, as well as an unexpected easing in monetary policy. JEL Codes: F31, F32, F36 and F65

Unit roots in the presence of abrupt governmental interventions with an application to Brazilian data Texto para discussão, No. 349

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractThe taper tantrum of May 2013 generated sharp fall in risky assets prices, including the depreciation of several emerging market currencies. To fight excess volatility and exchange rate overshooting, the Central Bank of Brazil announced a major program of interventions in foreign exchange markets. We use a synthetic control approach to determine whether or not the intervention program was successful. Our results suggest that the first FX intervention program mitigated the depreciation of the real against the dollar. A second announcement made later in the year that the program was going to continue on a smaller basis had a smaller effect, which was not significant. This result is corroborated by a standard event study methodology. We also document that both program did not have an impact on the volatility of the exchange rate.JEL classification codes: F31, G14.