Sustainability of the Brazilian public pebt an analysis using multicointegration

Rubens Cysne and Eduardo Lima Campos

No 805, FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) from EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil)

Abstract: According to Bohn (1995, 2008), the conventional sustainability tests, based on analyzing cointegration between government revenues and expenditures, are inconclusive for determining the sustainability of fiscal policy. This paper uses multicointegration (Granger and Lee, 1989) to investigate the validity of a long-term relationship between revenues and expenditures accumulated over time and the government debt/GDP ratio. According to Leachman et al. (2005) and Engsted et al. (2007), this technique enables conclusions to be reached regarding the sustainability of fiscal policy under more robust conditions. We propose a specification that allows for the evaluation of the reaction of both revenues and expenditures to variations in the debt/GDP ratio. The possibility of a nonsustainable debt/GDP trajectory cannot be disregarded.

Date: 2019-07
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