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Fiscal Policy in Brazil through the Lens of an Estimated DSGE Model

  • Fabia A. de Carvalho
  • Marcos Valli

This paper takes Brazilian data to an open economy DSGE model that features realistic aspects of fiscal policy in Brazil. The model incorporates primary surplus targets, cyclical expenditures and social programs in the form of public transfers, public investment and distortive taxation. We test for two competing specifications of the role of public capital in the real economy. Bayesian model comparison favors the infrastructure approach to public capital. The presence of non-Ricardian households allows fiscal policy shocks to affect real economy aggregates and distribution. The model is used to address questions regarding the effect of shocks to different fiscal policy instruments upon the business cycle. We also investigate whether recent fiscal policy in Brazil has exerted significant inflationary pressures.

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File URL: http://www.bcb.gov.br/pec/wps/ingl/wps240.pdf
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Paper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 240.

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Date of creation: Apr 2011
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Handle: RePEc:bcb:wpaper:240
Contact details of provider: Web page: http://www.bcb.gov.br/?english

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