Inflationary acceleration, financial instability and internal and external indebtedness

ABSTRACT We provide here a model that attempts to explain how the financial circuit in Brazil became an outstanding locus of wealth valuation. It shows that its special character is due to a peculiar institutional arrangement that allows the public sector - the main financial agent - to operate with negative spread. Then, inflationary shocks can produce very strong movements of private sector portfolio, between indexed and non-indexed bonds, which can deepen the negative spread. This is the reason why the financial circuit is a source of wealth valuation, since this negative spread is appropriated by the financial speculators.