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Institutions and Cyclicality of the Fiscal and Monetary Policies in Brazil

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  • Aline Gadelha
  • José Angelo Divino

Abstract

This paper investigates the relationship between the quality of institutions and the cyclical properties of macroeconomic policies in the Brazilian economy in the recent period. We extend the monetary and fiscal policy rules proposed by Taylor (2000) to incorporate a proxy for institutional quality. In the empirical analysis, we estimate reaction functions for monetary and fiscal policies by the Markov-Switching method. This methodology allows us to analyze how changes in the quality of institutions might influence the guidance of the fiscal and monetary policies over the sample period. The major results maintain that both monetary and fiscal policies are significantly countercyclical in periods that exhibit higher levels of institutional quality and are pro-cyclical or acyclical in periods which exhibit lower levels of institutional quality. Thus, the quality of institutions plays a key role in the government's ability to implement countercyclical monetary and fiscal policies to stabilize the Brazilian economy over the business cycle.

Suggested Citation

  • Aline Gadelha & José Angelo Divino, 2021. "Institutions and Cyclicality of the Fiscal and Monetary Policies in Brazil," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 13(4), pages 1-25, April.
    • Handle: RePEc:ibn:ijefaa:v:13:y:2021:i:4:p:25
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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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