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The quality of fiscal adjustment and the long-run growth impact of fiscal policy in Brazil

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  • Blanco, Fernando
  • Herrera, Santiago
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    Abstract

    The authors describe the main trends of Brazil's fiscal policy during the past decade and analyze (1)the ability to raise the primary surplus in response to external shocks, (2) the pro-cyclical nature of fiscal policy, and (3) the long-run impact of government expenditure composition and taxation. They analyze the use of the primary balance as a policy tool within the Drudi-Prati model, wherein the government uses the primary balance to reveal its commitment to service its debt. The authors verify that both the debt ratio and the primary balance are determinants of spreads and credit ratings in Brazil. But the relationship is nonlinear: the impact of the primary balance on spreads is amplified as the debt ratio increases. Using an Autoregressive Distributed Lag (ARDL) approach, the authors analyze the relationship between the primary balance and economic activity, finding a positive correlation in the long run. However, in the short run fiscal expansions are associated with primary balance reductions and vice-versa during output contractions, confirming the procyclical nature of fiscal policy in the short run. The authors use two approaches, ARDL and a cointegrating value at risk (VAR), to analyze the interaction between public expenditure composition and taxation on growth. Similar results are obtained: large elasticities of output with respect to capital stocks, a significant negative impact of taxation on long-run GDP, and a negative impact of increasing government consumption and transfer payments on GDP. These results shed light on the contribution of fiscal policy to disappointing growth performance in Brazil during the past decade.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 4004.

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    Date of creation: 01 Sep 2006
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    Handle: RePEc:wbk:wbrwps:4004

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    Related research

    Keywords: Economic Stabilization; Public Sector Expenditure Analysis&Management; Economic Theory&Research; Fiscal Adjustment; Banks&Banking Reform;

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    References

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    1. Michael Gavin & Ricardo Hausmann & Roberto Perotti & Ernesto Talvi, 1996. "Managing Fiscal Policy in Latin America and the Caribbean: Volatility, Procyclicality, and Limited Creditworthiness," IDB Publications 6797, Inter-American Development Bank.
    2. Pesaran, M.H. & Shin, Y., 1995. "An Autoregressive Distributed Lag Modelling Approach to Cointegration Analysis," Cambridge Working Papers in Economics 9514, Faculty of Economics, University of Cambridge.
    3. Alberto Alesina & Roberto Perotti, 1995. "Fiscal Expansions and Fiscal Adjustments in OECD Countries," NBER Working Papers 5214, National Bureau of Economic Research, Inc.
    4. Christophe Hurlin, 2001. "Estimating the contribution of public capital with times series production functions: a case of unreliable inference," Applied Economics Letters, Taylor & Francis Journals, vol. 8(2), pages 99-103.
    5. David Aschauer, 1988. "Is public expenditure productive?," Staff Memoranda 88-7, Federal Reserve Bank of Chicago.
    6. Narayana Kocherlakota & Christopher Phelan, 1999. "Explaining the fiscal theory of the price level," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 14-23.
    7. Barro, Robert J., 1990. "Government Spending in a Simple Model of Endogeneous Growth," Scholarly Articles 3451296, Harvard University Department of Economics.
    8. Hurlin, Christophe, 2001. "How to estimate the productivity of public capital ?," Economics Papers from University Paris Dauphine 123456789/6177, Paris Dauphine University.
    9. repec:fth:inadeb:326 is not listed on IDEAS
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    Cited by:
    1. Regis Bonelli, 2009. "Estado de uma Nação: Textos de Apoio - Estado e Economia: Estado e E Crescimento Econômico no Brasil," Discussion Papers 1393, Instituto de Pesquisa Econômica Aplicada - IPEA.

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