The Public Debt’s Dedollarization Effect in an Inflation Target Economy: A Theoretical Approach

Abstract

The main objective of this paper is to verify the necessary conditions for a possible existence of a steady state balance in an economy. This steady state balance contemplates in its long-term period, the dynamics of the inflation, the interest rate and the exchange rate. Besides, it is considered the public debt of the economy, which is indexed to these three variables in an environment where monetary politics incorporates the use of inflation target. In the stability analysis, it is possible to verify a rest position in the system framework. The conditions at this point present an economy with a mechanism of “dedollarization” of the public debt. By this first condition, the stability analysis calls attention with respect to the measure of the process of “dedollarization”. Depending on its intensity, the economy will show a positive wealth effect that could stimulate the expansion of the investments.