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Estimating a Fiscal Reaction Function: The Case of Debt Sustainability in Brazil

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  • Luiz de Mello

Abstract

This paper reviews recent trends in fiscal performance in Brazil, estimates fiscal reaction functions for the consolidated public sector and different levels of government, and tests for the sustainability of the public debt dynamics. The empirical analysis, based on monthly data for the period 1995-2004, suggests that all levels of government react strongly to changes in indebtedness by adjusting their primary budget surplus targets. In addition, the central government appears to follow a spend-and-tax policy: changes in revenue are affected strongly by expenditure, with about two-thirds of changes in primary spending being offset through higher revenue over the long term. Institutions are also found to matter for fiscal sustainability. The responsiveness of sub-national fiscal stance to indebtedness, as well as that of central government revenue to changes in primary spending, appears to have strengthened after 1998, when ceilings on indebtedness were introduced. Estimation des fonctions de réaction budgétaire : La soutenabilité de la dynamique de la dette publique au Brésil Cet article examine les tendances récentes des performances budgétaires au Brésil, estime les fonctions de réaction budgétaire pour le secteur public consolidé et les différents niveaux d’administration, et teste la soutenabilité de la dynamique de la dette publique. L'analyse empirique, basée sur des données mensuelles pour la période 1995-2004, suggère que tous les niveaux d’administration réagissent fortement aux changements de l'endettement en ajustant leurs cibles d’excédent budgétaire primaire. En outre, l’administration centrale semble suivre une politique de « dépenses suivi d’impôt »: les changements de revenu sont affectés fortement par les dépenses, avec environ deux tiers des changements de la dépense primaire étant compensée par un plus haut revenu sur le long terme. Les institutions budgétaires sont également importantes en matière de soutenabilité budgétaire. La réaction des administrations locales à l'endettement, ainsi que celle du revenu de l’administration centrale aux changements de la dépense primaire, semble s’être renforcé après 1998, quand des plafonds sur l'endettement ont été introduits.

Suggested Citation

  • Luiz de Mello, 2005. "Estimating a Fiscal Reaction Function: The Case of Debt Sustainability in Brazil," OECD Economics Department Working Papers 423, OECD Publishing.
  • Handle: RePEc:oec:ecoaaa:423-en
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    File URL: http://dx.doi.org/10.1787/556325773018
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    References listed on IDEAS

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    1. Ahmed, Shaghil & Rogers, John H., 1995. "Government budget deficits and trade deficits Are present value constraints satisfied in long-term data?," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 351-374, November.
    2. Bohn, Henning & Inman, Robert P., 1996. "Balanced-budget rules and public deficits: evidence from the U.S. states," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 45(1), pages 13-76, December.
    3. Galí, Jordi & Perotti, Roberto, 2003. "Fiscal Policy and Monetary Integration in Europe," CEPR Discussion Papers 3933, C.E.P.R. Discussion Papers.
    4. Henning Bohn & Robert P. Inman, "undated". "Balanced Budget Rules and Public Deficits: Evidence from the U.S. States (Reprint 060)," Rodney L. White Center for Financial Research Working Papers 10-96, Wharton School Rodney L. White Center for Financial Research.
    5. Marcio Garcia & Roberto Rigobon, 2004. "A Risk Management Approach to Emerging Market's Sovereign Debt Sustainability with an Application to Brazilian Data," NBER Working Papers 10336, National Bureau of Economic Research, Inc.
    6. Roberto Rigobon & Marcio Garcia, 2004. "A Risk Management Approach to Emerging Market’s Sovereign Debt Sustainability with an application to Brazilian data," Econometric Society 2004 Latin American Meetings 24, Econometric Society.
    7. International Monetary Fund, 2004. "Fiscal Policy and Debt Sustainability; Cardoso's Brazil, 1995-2002," IMF Working Papers 04/156, International Monetary Fund.
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    Cited by:

    1. Piotr Ciżkowicz & Andrzej Rzońca & Rafał Trzeciakowski, 2015. "Windfall of Low Interest Payments and Fiscal Sustainability in the Euro Area: Analysis through Panel Fiscal Reaction Functions," Kyklos, Wiley Blackwell, vol. 68(4), pages 475-510, November.
    2. STOIAN, Andreea, 2012. "The Study Of Fiscal Sustainability For The Case Of Overindebted European Countries," Studii Financiare (Financial Studies), Centre of Financial and Monetary Research "Victor Slavescu", vol. 16(4), pages 43-62.
    3. Jean-Marc Fournier & Falilou Fall, 2015. "Limits to government debt sustainability," OECD Economics Department Working Papers 1229, OECD Publishing.
    4. Luiz de Mello, 2007. "The Brazilian 'Tax War': The Case of Value-Added Tax Competition among the States," OECD Economics Department Working Papers 544, OECD Publishing.
    5. Katia Berti & Eugeniu Colesnic & Cyril Desponts & Stephanie Pamies & Etienne Sail, 2016. "Fiscal Reaction Functions for European Union Countries," European Economy - Discussion Papers 2015 - 028, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    6. Guillaume Bousquet & Christian Daude & Christine de la Maisonneuve, 2015. "Fiscal Decentralisation in Colombia: New Evidence Regarding Sustainability, Risk Sharing and “Fiscal Fatigue”," OECD Economics Department Working Papers 1202, OECD Publishing.
    7. repec:eee:ecmode:v:66:y:2017:i:c:p:30-41 is not listed on IDEAS

    More about this item

    Keywords

    Brazil; Brésil; debt sustainability; fiscal reaction function; fiscal rules; fonction de réaction budgétaire; règles budgétaires; soutenabilité de dette;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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