Effect of Fiscal Policy Shocks in Brazil

Nkrumah, Kwabena Meneabe (2013): Effect of Fiscal Policy Shocks in Brazil.

Abstract

This article makes a comprehensive assessment of the effect of a fiscal policy shock in Brazil. I found that gross domestic product does not rise in the short run in response to the fiscal policy shock albeit it rises in the long run. In addition, I found that unlike an advanced economy like the USA, the response of both fiscal and monetary variables estimated in the VAR are very volatile with the stock price index which represents Brazil’s financial sector in the VAR model responding negatively (revenue shock) to the policy innovation in the short run while rising and falling below the steady state several times throughout the forecasting horizon. Possible explanations for these results includes weak economic and political institutional frameworks leading to weak transmission mechanisms of fiscal policy innovations. In fact when government expenditure is not used for infrastructure projects, utility-generating economic activities or externalities that gets onto the economic production function, then extra government expenditure ends up taking resources away from the Brazilian economy.

• Item Type: MPRA Paper
• Language: English
• Keywords: Macroeconomics, Fiscal Policy, Aggregate Demand, Vector Autoregressions, Gross Domestic Product, Political Economics, Developing Economies.
• Subjects: E - Macroeconomics and Monetary Economics > E0 - General > E00 - General; E - Macroeconomics and Monetary Economics > E0 - General > E02 - Institutions and the Macroeconomy; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E65 - Studies of Particular Policy Episodes; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O11 - Macroeconomic Analyses of Economic Development

References

Abiad, A., Bluedorn, J., Guajardo, J. & Topalova, P. (2012). The Rising Resilience of Emerging and Developing Economies, IMF Working Paper Series, WP/12/300.

Afonso, A. & Sousa, R.M. (2011). What are the Effects of Fiscal Policy on Asset Markets? Economic Modelling, 28, 1871-1890.

Agnello, L. & Sousa, R.M. (2010). Fiscal Policy and Asset Prices. NIPE Working Paper Series, WP 25/2010.

Allsopp, C. & Vines, D. (2005). The Macroeconomic Role of Fiscal Policy. Oxford Review of Economic Policy, 21(4).

AMIGOS DA TERRA – AMAZÔNIA BRASILEIRA (2012). An Introduction to the Brazilian Banking Sector and its Sustainability Practices. Accessed at http://www.banktrack.org/show/news/an_introduction_to_the_brazilian_banking_sector_and_its_sustainability_practices on 04/08/13 at 19:11.

Bernanke, B. & Kuttner, K. (2005). What Explains the Stock Market's Reaction to Federal Reserve policy? Journal of Finance, 60(3), 1221-1257.

Blanchard, O. & Leigh, D. (2013). Growth Forecast Errors and Fiscal Multipliers. IMF Working Paper Series, WP/13/1.

Blanchard, O. & Perotti, R., (2002). An empirical characterization of the dynamic effects of changes in government spending and taxes on output. The Quarterly Journal of Economics, 117 (4), 1329–1368.

Brandao-Marques, L., Gelos, G. & Melgar, N. (2013). Country Transparency and the Global Transmission of Financial Shocks. IMF Working Paper Series, WP/13/156.

Burriel, P., De Castro, F., Garrote, D., Gordo, E., Paredes, J. & Perez, J.J. (2010). Fiscal Policy Shocks in the Euro Area and US: An Empirical Assessment. Fiscal Studies, 31(2), 251-285.

Caldara, D. & Kamps, K. (2008). What are the effects of fiscal policy shocks? A VAR based comparative analysis. Working Paper Series 877: European Central Bank.

Catao, L.A.V. & Terrones, M.E. (2005). Fiscal Deficits and Inflation. Journal of Monetary Economics, 52, 529-554.

Cecchetti, S., G. (2000). Making Monetary Policy: Objectives and Rules. Oxford Review of Economic Policy, 16(4).

Chatziantoniou, I., Duffy, D. & George, F. (2013). Stock Market Response to Monetary and Fiscal Policy Shocks: Multi Country Evidence. Economic Modelling, 30, 754-769.

Christiano, L. J., Eichenbaum, M. & Evans, C.L. (2005). Nominal rigidities and the dynamic effects of a shock to monetary policy. Journal of Political Economy, 113(1), 1-45.

Cimadomo, J. & Bénassy-Quéré, A. (2012). Changing Patterns of Fiscal Multipliers in Germany, the UK and the US. Journal of Macroeconomics, 34, 845-873.

Darrat, A. F. (1988). On Fiscal Policy and Stock Market. Journal of Money Credit and Banking, 20(3), 353-363.

David, A. C. & Petri, M. (2013). Inclusive Growth and the Incidence of Fiscal Policy in Mauritius – Much Progress but More Could be Done, IMF Working Paper Series, WP/13/116.

Dell’Erba, S. & Sola, S. (2013). Does Fiscal Policy Affect Interest Rates? Evidence from a Factor-Augmented Panel. IMF Working Paper Series, WP/13/159.

Denes, M., Eggertsson, G.B. & Gilbukh, S. (2013). Deficits, Public Debt Dynamics and Tax and Spending Multipliers. The Economic Journal, 123, 135-163.

Duarte, M. & Wolman, A. L. (2008). Fiscal Policy and Regional Inflation in a Currency Union. Journal of International Economics, 74, 384-401.

Eyraud, L. & Weber, A. (2013). The Challenge of Debt Reduction during Fiscal Consolidation. IMF Working Paper Series, WP/13/67.

Fragetta, M. & Melina, G. (2010). The Effects of Fiscal Shocks in SVAR Models: A Graphical Modelling Approach. Birkbeck Working Papers in Economics and Finance, BWPEF 1006.

Goldman Sachs: Global Economic Paper No. 34. Accessed from http://www.goldmansachs.com/our-thinking/archive/archive-pdfs/brics-book/brics-full-book.pdf on 18/08/2013 at 14:45.

Fatas, A. & Mihov, I. (2013). On the Global Economy: Let’s Get Real about the Stock Market. Accessed from http://fatasmihov.blogspot.co.uk/2013/05/lets-get-real-about-stock-market.html on 04/08/13 at 13:58.

Jawadi, F., Mallick S., K. & Sousa, R., M. (2011). Fiscal Policy in the BRICS. NIPE, Working Paper Series, 19 (2011).

Keynes, J. M. (2008), The General Theory of Employment, Interest and Money. California: BN Publishing.

Khanna, T., Palepu, K.G. & Sinha, J. (2005). Strategies that Fit Emerging Markets. Harvard Business Review, 83, 63–76.

Kirsanova, T., Stehn, S. J. & Vines, D. (2005). The Interactions between Fiscal Policy and Monetary Policy. Oxford Review of Economic Policy, 21(4).

Leitemo, K. (2004). A Game between the Fiscal and Monetary Policy Authorities under Inflation Targeting. European Journal of Political Economy, 20, 704-724.

Leith, C., Warren, P. & Lewis-Wren, S. (2003). Fiscal Policy, Interest Rates Shocks and Prices. Economic Modelling, 20, 361-382.

Ltkepohl, H. & Krätzig, M. (2004). Applied Time Series Econometrics. Cambridge: Cambridge University Press.

Malik, A.K. (2013). The Effects of Fiscal Spending Shocks on the Performance of Simple Monetary Policy Rules. Economic Modelling, 30, 643-662.

Mallick, S., K. & Sousa, R., M. (2011). Inflationary Pressures and Monetary Policy: Evidence from BRICS economies. NIPE, Working Paper Series, (2011).

Malkiel, B. G. (2003). The Efficient Market Hypothesis and Its Critics, Journal of Economic Perspectives, 17(1), 59-82.

Mauro, P., Romeu, F., Binder, A. & Zaman A. (2013). A Modern History of Fiscal Prudence and Profligacy. IMF Working Paper Series, WP/13/5.

Melitz, J. (1997). Some cross-country evidence about debt, deficits and the behaviour of monetary and fiscal authorities. CEPR Discussion Paper, No. 1653. CEPR, London.

Mishkin, F.S. (2004). Can Inflation Targeting Work in Emerging Market Countries. IMF Working Paper Series

Mountford A. & Uhlig, H. (2005). What are the Effects of Fiscal Policy Shocks? Journal of Applied Econometrics, 24, 960-992.

Ogawa, S., Park, J., Singh, D. & Thacker, N. (2013). Financial Interconnectedness and Financial Sector Reforms in the Caribbean. IMF Working Paper Series, WP/13/175.

Ramey V. & Shapiro M. (1998). Costly Capital Reallocation and the Effects of Government Spending. In Carnegie Rochester Conference on Public Policy, 48, 145-194.

Rigobon, R. & Sack, B. (2003). Measuring the reaction of monetary policy to the stock market. Quarterly Journal of Economics, 118(2), 639-670.

Sargent, T.J. & Wallace, N. (1981). Some Unpleasant Monetarist Arithmetic. Federal Reserve Bank of Minneapolis Quarterly Review, 5, 1–17.

The Economist (2012). The Problem of Zero. Accessed at http://www.economist.com/blogs/freeexchange/2012/11/economy-and-election-0?fsrc=nlw%7Cnewe%7C11-7-2012%7C4080812%7C64986850%7CUK on 03/08/2013 at 22:41.

University of Surrey School of Economics Alumni Lecture: Jim O’Neil (2012). Accessed from https://alumni.surrey.ac.uk/netcommunity/page.aspx?pid=1840 on 18/08/2013 at 14:51.

Warner, A.M. (2013). A Framework for Efficient Government Investment. IMF Working Paper Series, WP/13/58.