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Estimating a Fiscal Reaction Function: The Case of Debt Sustainability in Brazil

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Author Info
Luiz de Mello ()
Abstract

This paper reviews recent trends in fiscal performance in Brazil, estimates fiscal reaction functions for the consolidated public sector and different levels of government, and tests for the sustainability of the public debt dynamics. The empirical analysis, based on monthly data for the period 1995-2004, suggests that all levels of government react strongly to changes in indebtedness by adjusting their primary budget surplus targets. In addition, the central government appears to follow a spend-and-tax policy: changes in revenue are affected strongly by expenditure, with about two-thirds of changes in primary spending being offset through higher revenue over the long term. Institutions are also found to matter for fiscal sustainability. The responsiveness of sub-national fiscal stance to indebtedness, as well as that of central government revenue to changes in primary spending, appears to have strengthened after 1998, when ceilings on indebtedness were introduced.

Estimation des fonctions de réaction budgétaire : La soutenabilité de la dynamique de la dette publique au Brésil
Cet article examine les tendances récentes des performances budgétaires au Brésil, estime les fonctions de réaction budgétaire pour le secteur public consolidé et les différents niveaux d’administration, et teste la soutenabilité de la dynamique de la dette publique. L'analyse empirique, basée sur des données mensuelles pour la période 1995-2004, suggère que tous les niveaux d’administration réagissent fortement aux changements de l'endettement en ajustant leurs cibles d’excédent budgétaire primaire. En outre, l’administration centrale semble suivre une politique de « dépenses suivi d’impôt »: les changements de revenu sont affectés fortement par les dépenses, avec environ deux tiers des changements de la dépense primaire étant compensée par un plus haut revenu sur le long terme. Les institutions budgétaires sont également importantes en matière de soutenabilité budgétaire. La réaction des administrations locales à l'endettement, ainsi que celle du revenu de l’administration centrale aux changements de la dépense primaire, semble s’être renforcé après 1998, quand des plafonds sur l'endettement ont été introduits.

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Paper provided by OECD Economics Department in its series OECD Economics Department Working Papers with number 423.

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Date of creation: 01 Apr 2005
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Handle: RePEc:oec:ecoaaa:423-en

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Related research
Keywords: fiscal rules règles budgétaires Brazil Brésil debt sustainability fiscal reaction function soutenabilité de dette fonction de réaction budgétaire

Find related papers by JEL classification:
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management

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