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Fiscal Rules and the Effectiveness of Monetary Policy: Estimates for a Large Emerging Economy

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  • Anjos, Daniel
  • Moreira, Ricardo

Abstract

This work evaluated the effect of fiscal policy on the effectiveness of monetary policy by the Central Bank of Brazil. Using monthly data from January-2003 to January-2020, a test was conducted to gauge how the cyclicality degree of the fiscal policy – in light of the variations in the public debt – affected the variability of the short-term real interest rate. To this goal, we extracted a fiscal response index from an unobservable state variable using the Kalman filter. Applying the cointegration method and GMM estimation, the results revealed that the smoothing and effectiveness of monetary policy depend on the degree of fiscal responsiveness to the level of public indebtedness.

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  • Anjos, Daniel & Moreira, Ricardo, 2023. "Fiscal Rules and the Effectiveness of Monetary Policy: Estimates for a Large Emerging Economy," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 76(4), March.
    • Handle: RePEc:fgv:epgrbe:v:76:y:2023:i:4:a:85596
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