An Analysis of the Interaction Between Monetary and Fiscal Policies in Brazil

Livia Carolina Machado Melo () and Cleomar Gomes Da Silva
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Livia Carolina Machado Melo: University of Sao Paulo (USP-FEARP)

PSL Quarterly Review, 2019, vol. 72, issue 288, 53-71

Abstract: This paper examines monetary and fiscal policy rules in Brazil for the period 2003-2014, based on a New Keynesian Macro Model estimated via GMM System. The main results show an aggregate demand focused on the lagged GDP output and on GDP growth expectations. As for inflation, the use of hybrid Phillips curve, as well as the influence of the exchange rate, seems to be the case for Brazil. Regarding the Taylor Rule, the Central Bank?s reaction is gradual, via interest rate smoothing, and the expected inflation and GDP are important for the determination of the rule. Therefore, monetary policy seems to be counter-cyclical. As for the Fiscal Policy Rule, the dynamics of economic activity leads to a decrease in the public sector borrowing requirement (PSBR), as % of GDP, which is an indication of a counter-cyclical fiscal policy and coordination of economic policies. However, this may only indicate that GDP grows faster than PSBR, and not that the latter is decreasing. As a result, it is not possible to assure that the Brazilian fiscal policy is actually coordinated with the country's monetary policy.

Keywords: Monetary Policy; Fiscal Policy; Generalized Method of Moments (search for similar items in EconPapers)
JEL-codes: C32 E52 E63 (search for similar items in EconPapers)
Date: 2019
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