Post-2008 Brazilian Fiscal Policy: an Interpretation through the Analysis of Fiscal Multipliers

The global crisis that erupted in 2007 led many countries to embark on countercyclical fiscal policies as a way to cushion the blow of a depressed aggregate demand. Advocates of discretionary measures emphasize that fiscal policy can indeed stimulate the economy. The main goal of this work is to assess whether the fiscal policies pursued by the Brazilian government in the aftermath of the 2008 crisis succeeded in bringing the economy back on track in a sustainable fashion. To this end, the fiscal multipliers of five different shocks are studied in a small open-economy New Keynesian framework. Our results point to the government spending and public investment as the most effective fiscal tools for combating the crisis. However, the highest fiscal multiplier turned out to be the one associated with excise tax reductions. Interestingly, contrary to the government’s expectations, this policy of lowering taxes on manufactured durable goods (IPI) was found to be neutral at a longer horizon as it was not applied horizontally to all sectors of the economy. Seeking to understand, analyze and compare the effects of expenditure- and revenue-based fiscal policies on the Brazilian economy over the post-crisis period of 2008, a standard DSGE model (with the main frictions of this methodology) has been developed and estimated. The model features public capital stock as an input, thus allowing for the analysis of the effects of shocks to public investment on the marginal productivity of private inputs and on the GDP. The spending-based measures were the most successful in affecting GDP over the whole period studied, primarily because of PAC2, whose actual goal was to bolster aggregate demand. It is worth mentioning that stimulus program led to a positive result only up until 2013. Actually, the systematic reduction of this multiplier that followed from that year onwards contributed to deterioration of the Brazilian economy. However, these tools were not the only ones the government availed itself of to prop up aggregate demand. It also resorted to tax exemptions from durable goods consumption without much success, as already underscored above. The main reason for this policy to have failed is that this fiscal stimulus was only targeted at the durable-goods sector, which caused the consumption of non-durable goods to decrease. This latter effect ended up offsetting the positive impact of this policy on economic activity. As already laid out before, should this tax-exemption policy be applied in an horizontal way to all sectors of the economy, the result would be the most efficient one among all fiscal measures under study.