BALANCING THE BUDGET WITH IMPLICIT DOMESTIC DEFAULT - THE CASE OF BRAZIL IN THE 1980S

This paper examines the breakdown of the Brazilian government's budget -balance mechanism, which began in the mid-1980s. The Brazilian govern ment became unable to balance its budget through tax increases or expe nditure decreases. Evidence presented in this paper suggests that the government began to rely on unannounced reductions in the indexed infl ation compensation on its debt. These reductions can be thought of as an implicit default on domestically held debt. While the ''temporary a sset freeze'' of the March 1990 Collor plan was a highly publicized in stance of such a default, it was not the first.