Analysis of the Financial Fragility Hypothesis Applied of Brazilian States by Means of Structural Equations

Abstract

Studies of financial instability were undertaken by Hyman Minsky, his analyses resulted in the Financial Fragility Hypothesis. Such phenomena can also be studied and analysed from the point of view of governments’ financial positions. In this context, the aim of this study was to analyse the effects of public debt interest and charges on financial fragility in relation to Brazilian states’ public debt. For this purpose, structural equation modelling was used as the empirical procedure. The effects of the structural model’s constructs explained 90.2% of the Public Sector Financial Position, specifically, in this study, the Brazilian states’ financial position. The Gaussian Copula technique was used to assess the model's endogeneity problems, which were not found. The results show that financial fragility in Brazilian states is caused by excessive current spending but is aggravated by interest and amortization costs that exceed the Current Revenue/Current Expenditure balance.