Fiscal dominance and the fiscal reaction rule: an empirical analysis for Brazil

Author(s)

Marianne Thamm de Aguiar

• Document type: Master's Dissertation
• Press: São Paulo.
• Institution: Universidade de São Paulo (USP). Faculdade de Economia, Administração e Contabilidade (FEA/SBD)
• Defense date: 2007-09-10

Examining board members

Carlos Eduardo Soares Gonçalves; Fabiana Fontes Rocha; Mauro Rodrigues Junior

• Advisor: Carlos Eduardo Soares Gonçalves

Abstract

This research, which is divided into two parts, tests the hypothesis of fiscal dominance and estimates a fiscal reaction rule for Brazil. In the first part we investigate the existence of fiscal dominance in Brazil beginning 1999 ? the starting point of primary surplus targets by the Government ? through an impulse response function. Our analysis indicates that the fiscal dominance does not apply for the concerned period. In the second part, we investigate if the Brazilian fiscal authority follows any rule of fiscal reaction. We intent to test if the Government reacts adjusting the primary surplus to debt variations, maintaining the sustainability of the debt/GDP ratio and preserving the efficacy of the monetary policy. For the period prior to the primary surplus targets (1995-1998), it?s not possible to define a rule of fiscal reaction, as the primary surplus does not respond to variations in the public debt. However, for the 1999-2006 period, we found that the Government does follow a fiscal reaction rule, highlighting the preoccupation of avoiding the fiscal dominance, even though the rule?s specification is distinct for the mandates of Fernando Henrique Cardoso and Lula. (AU)