Fiscal Policy Rules: A New Keynensian Model for Brazil

The study employs a New Keynesian general equilibrium model to simulate three distinct designs of fiscal rules in the Brazilian economy, assessing their impacts on consumer welfare. Specifically, it tests a rule for government fiscal deficit, a rule concerning the structural fiscal deficit, and finally, the so-called Golden Rule, which exempts public investments from the budget constraint. The DSGE (Dynamic Stochastic General Equilibrium) model used in this study features two main agents: a representative Ricardian agent and a non-Ricardian agent, which aligns well with the Brazilian economic context and falls under the classification of TANK (Two-Agent New Keynesian) models. A notable contribution of this study is the explicit modeling of the external market, represented by the commodity cycle. We estimated specific model parameters for the Brazilian economy using Bayesian methods, leveraging recent computational advances. The data used are annual, and the sample period for this study spans from 2002 to 2023. Consumer welfare is evaluated using a welfare coefficient. Furthermore, we simulated two different shocks to the economy and analyzed the impact of these shocks on selected variables through impulse response functions and conditional moments. Our main findings suggest that consumer welfare under the Structural Fiscal Deficit Rule, which constrains government investments and is conditioned on the economic cycle, provides the highest welfare to consumers, both Ricardian and non-Ricardian.