The Fiscal Theory of the Price Level and the Interaction of Monetary and Fiscal Policies: The Brazilian Case

Abstract

This paper aims to derive an optimal monetary policy rule in a context of fiscal disequilibrium and to empirically test whether Brazil presents active or passive fiscal and monetary policies. We analyze the transmission channels of the fiscal and monetary policies through estimation of a Philips curve and the fiscal IS curve. The results indicate that the fiscal deficit is statistically significant and affects the inflation rate indirectly via output gap. The empirical findings using the Leeper model indicate that the monetary policy is passive whereas the fiscal policy is active. In this context, we found empirical evidence that the Brazilian economy shows a fiscal dominance regime for the period 1995: I to 2006: II.

The Interaction of Monetary and Fiscal Policy: The Brazilian Case

“…On the basis of our findings, we can also infer that there are strong empirical evidences that the fiscal policy was active and the monetary policy was passive based on Leeper model. Reference [28] found similar results.…”

Central Bank preferences and monetary rules under the inflation targeting regime in Brasil

“…In equation (3), we follow Freitas and Muinhos (2001) and Moreira et al (2007) and assume that the nominal exchange rate follows a random walk. The expected signs for the responses of inflation rate 3 Following a suggestion of an anonymous referee, we estimated an alternative econometric model that tries to resemble an open-economy DSGE model.…”

“…Following Moreira et al (2007), we assume that the discount factor, δ, is equal to 0.98. In addition, we considered that the weight on interest rate smoothing can vary on the interval [0-0.95] in steps of 0.05.…”

“…The third case differs from the previous one because there is no concern with interest rate smoothing. This set of weights is particularly important since it was used by Almeida et al (2003) and Moreira et al (2007) for obtaining optimal monetary policy rules for the Brazilian economy. The fourth case is the set of weights calibrated by our calibration strategy.…”

An evaluation of the tolerant to higher inflation rate in the short run by the Brazilian Central Bank in the period 2001-2012

“…We highlight here a number of studies that estimate rules à la Taylor. These are ANDRADE and DIVINO (2001), MENDONÇA (2001), FIGUEIREDO and FERREIRA (2002), MINELLA et al (2002), FAVERO and GIAVAZZI (2002), MINELLA et al (2003), SALGADO et al (2005), MENDONÇA (2007), MOREIRA et al (2007), MODENESI (2011) andMOREIRA (2011). ROMER and ROMER (2002) make an interesting study on the implementation of U.S. monetary policy to the various mandates of the presidents of the FED based on the evaluation of the minutes of the Monetary Policy Committee (FOMC).…”