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Monetary and Fiscal Policies Interaction in a Large Emerging Economy: Which Is the Leader Policy?

Author

Listed:
  • Ricardo Ramalhete Moreira
  • Edson Zambon Monte

Abstract

This article analyzed the intertemporal interaction between monetary and fiscal policies in Brazil. We aimed at identifying if structural innovations to the real interest rate were able to induce unexpected effects on fiscal and inflation dynamics. To do so, we estimated Structural Vector Autoregressive (SVAR) models over the period from Jan/2004 to Apr/2019. Moreover, we filtered out the time series’ long-memory component through a fractional integration approach, so that we did not build our analysis on traditional unit root tests. The findings showed that monetary policy shocks robustly activated an unconventional transmission channel based on the Fiscal Theory of the Price Level, i.e., an unexpected and induced change in primary surpluses, through a wealth effect, as mechanism to satisfy the Government’s intertemporal budget constraint. Such a result is strongly linked to another evidence, that is, the monetary policy`s role as a leader in shaping inflation over time.

Suggested Citation

  • Ricardo Ramalhete Moreira & Edson Zambon Monte, 2021. "Monetary and Fiscal Policies Interaction in a Large Emerging Economy: Which Is the Leader Policy?," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 13(11), pages 1-77, November.
    • Handle: RePEc:ibn:ijefaa:v:13:y:2021:i:11:p:77
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    References listed on IDEAS

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    2. Gottschalk, Jan, 2001. "An Introduction into the SVAR Methodology: Identification, Interpretation and Limitations of SVAR models," Kiel Working Papers 1072, Kiel Institute for the World Economy.
    3. Lee, Hyung S. & Amsler, Christine, 1997. "Consistency of the KPSS unit root test against fractionally integrated alternative," Economics Letters, Elsevier, vol. 55(2), pages 151-160, August.
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    6. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
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    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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