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The quality of fiscal adjustment and the long-run growth impact of fiscal policy in Brazil

Author

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  • Blanco, Fernando
  • Herrera, Santiago

Abstract

The authors describe the main trends of Brazil's fiscal policy during the past decade and analyze (1)the ability to raise the primary surplus in response to external shocks, (2) the pro-cyclical nature of fiscal policy, and (3) the long-run impact of government expenditure composition and taxation. They analyze the use of the primary balance as a policy tool within the Drudi-Prati model, wherein the government uses the primary balance to reveal its commitment to service its debt. The authors verify that both the debt ratio and the primary balance are determinants of spreads and credit ratings in Brazil. But the relationship is nonlinear: the impact of the primary balance on spreads is amplified as the debt ratio increases. Using an Autoregressive Distributed Lag (ARDL) approach, the authors analyze the relationship between the primary balance and economic activity, finding a positive correlation in the long run. However, in the short run fiscal expansions are associated with primary balance reductions and vice-versa during output contractions, confirming the procyclical nature of fiscal policy in the short run. The authors use two approaches, ARDL and a cointegrating value at risk (VAR), to analyze the interaction between public expenditure composition and taxation on growth. Similar results are obtained: large elasticities of output with respect to capital stocks, a significant negative impact of taxation on long-run GDP, and a negative impact of increasing government consumption and transfer payments on GDP. These results shed light on the contribution of fiscal policy to disappointing growth performance in Brazil during the past decade.

Suggested Citation

  • Blanco, Fernando & Herrera, Santiago, 2006. "The quality of fiscal adjustment and the long-run growth impact of fiscal policy in Brazil," Policy Research Working Paper Series 4004, The World Bank.
  • Handle: RePEc:wbk:wbrwps:4004
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    References listed on IDEAS

    as
    1. Pesaran, M.H. & Shin, Y., 1995. "An Autoregressive Distributed Lag Modelling Approach to Cointegration Analysis," Cambridge Working Papers in Economics 9514, Faculty of Economics, University of Cambridge.
    2. Aschauer, David Alan, 1989. "Is public expenditure productive?," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 177-200, March.
    3. Alberto Alesina & Roberto Perotti, 1995. "Fiscal Expansions and Fiscal Adjustments in OECD Countries," NBER Working Papers 5214, National Bureau of Economic Research, Inc.
    4. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 103-126, October.
    5. Michael Gavin & Ricardo Hausmann & Roberto Perotti & Ernesto Talvi, 1996. "Managing Fiscal Policy in Latin America and the Caribbean: Volatility, Procyclicality, and Limited Creditworthiness," Research Department Publications 4032, Inter-American Development Bank, Research Department.
    6. Christophe Hurlin, 2001. "Estimating the contribution of public capital with times series production functions: a case of unreliable inference," Applied Economics Letters, Taylor & Francis Journals, vol. 8(2), pages 99-103.
    7. Narayana R. Kocherlakota & Christopher Phelan, 1999. "Explaining the fiscal theory of the price level," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 14-23.
    8. repec:dau:papers:123456789/6177 is not listed on IDEAS
    9. repec:idb:wpaper:326 is not listed on IDEAS
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    Citations

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    Cited by:

    1. Triches, Divanildo & da Silva, Soraia Santos, 2014. "Uma Nota Sobre Efeitos de Gastos Públicos Federais Sobre o Crescimento da Economia Brasileira," Revista Brasileira de Economia - RBE, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 68(4), October.
    2. repec:fgv:epgrbe:v:68:y:2015:i:4:a:3616 is not listed on IDEAS
    3. Regis Bonelli, 2009. "Estado de uma Nação: Textos de Apoio - Estado e Economia: Estado e E Crescimento Econômico no Brasil," Discussion Papers 1393, Instituto de Pesquisa Econômica Aplicada - IPEA.

    More about this item

    Keywords

    Economic Stabilization; Public Sector Expenditure Analysis&Management; Economic Theory&Research; Fiscal Adjustment; Banks&Banking Reform;

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