This was my undergraduate Honor's Thesis, advised by Professors John Cochrane and John Taylor.
I explore recent episodes of inflation in Brazil, looking at how expectations of fiscal sustainability interact with unexpected inflation.
Abstract
This paper examines the relationship between expectations of fiscal sustainability and inflation in Brazil. I use Vector Autoregressions (VAR) to analyze inflation dynamics and plot impulse responses using empirical data from Brazil from 2001-2019. I also introduce sovereign Credit Default Swaps (CDS) as a signal of expected future fiscal sustainability and find a correlation between CDS premia and unexpected inflation, supporting a fiscal theory interpretation of inflation. This work builds on literature that highlights the interdependent role of fiscal and monetary policy in inflation stabilization by focusing on Brazil, a country with a notable history of fiscal and monetary policy changes.
Also available in SSRN.