Pro-cyclical fiscal policy in Brazil: long- and short-term relationships using cointegration and error correction model (2005-2015)

Monetary and Fiscal Policies Interaction in a Large Emerging Economy: Which Is the Leader Policy?

“…With regard to Campos and Cysne (2019), we assumed that the primary surplus responds to the lagged public debt change, although in a weak magnitude (0.05 for 𝑏 𝑑𝑒𝑏𝑡−1,𝑝𝑠 ). This evidence is consistent with other works pointing to a pro-cyclical fiscal policy path in Brazil, such as Moreira (2017). In turn, we allowed for an inertial inflationary component (0.8 for 𝑏 𝑝𝑡−1,𝑝 ), i.e., an effect of the lagged inflation rate on the current level.…”

“…These works aimed at investigating the nature of the fiscal rule and thus if the Brazilian public debt could be regarded as sustainable in long-term. Specifically, Moreira (2017) and Campos and Cysne (2019) found evidence for a pro-cyclical fiscal policy, mainly since the years around 2011, then confirming a loss of responsiveness of the primary surplus to the public debt path.…”

“…These tests pointed to a 01-lag model, which was consistent with a stable parameter structure by means of the inverse roots of AR characteristic polynomial (Figure 2). In order to identify the exclusion restrictions on the Γ matrix, we considered a regime of an active fiscal policy, in which the primary surpluses (𝑝𝑠) are exogenous (or pro-cyclical) to the public debt dynamics (in accordance with Campos &Cysne, 2019 andMoreira, 2017). It is also in consistency with the fact of 𝑑 ̂> 1 for our fiscal variables, pointing to their high persistence (see Table 1).…”

Public Debt Path and Long-Memory in Fiscal Data: An Analysis for a Developing Country

“…In turn, Moreira (2017) analyzed the nature of the fiscal rule in Brazil, during the period from January 2005 to April 2015, and by using a Vector Error Correction approach. The main findings indicated that Brazil"s fiscal policy was a pro-cyclical one, thus contributing to understand why such a policy was not enough to impose a sustained downturn movement of the public debt/GDP ratio over the entire sample.…”

“…Specifically for the Brazilian case, these studies brought relevant findings which pointed to a lack of fiscal consolidation consistency over time, while some of them stressing the pro-cyclical bias of the fiscal rule regarding the last years (Moreira, 2017;Campos & Cysne, 2019). However, there exists a weak point in these works: the lack of adequate treatments for long-memory in the data, so that their main evidence could be a result of potential over or underestimation for the fiscal cyclicality coefficient.…”