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

• Main Authors: Lívia Carolina Machado Melo, Cleomar Gomes da Silva
• Format: Article
• Language: English
• Published: Associazione Economia civile 2019-03-01
• Series: PSL Quarterly Review
• Subjects: monetary policy; fiscal policy; generalized method of moments
• Online Access: https://ojs.uniroma1.it/index.php/PSLQuarterlyReview/article/view/13971/pdf

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.