Is the public sector of your country a diffusion borrower? Empirical evidence from Brazil

TL;DR

This paper introduces a diffusion model to analyze how subnational credit operations influence the national level in Brazil, providing insights for public finance management.

Contribution

It presents a novel diffusion process model that accurately captures the aggregate credit dynamics from subnational data in a sovereign country.

Findings

The model accurately describes national credit dynamics despite subnational heterogeneity.

Empirical evidence from Brazil supports the diffusion process as a useful tool.

Results can inform debt management strategies at the national level.

Abstract

We propose a diffusion process to describe the global dynamic evolution of credit operations at a national level given observed operations at a subnational level in a sovereign country. Empirical analysis with a unique dataset from Brazilian federate constituents supports the conclusions. Despite the heterogeneity observed in credit operations at a subnational level, the aggregated dynamics at a national level were accurately described with the proposed model. Results may guide management of public finances, particularly debt manager authorities in charge of reaching surplus targets.