Monetary and fiscal policy interactions in Brazil: an application of the fiscal theory of the price level

Abstract

The aim of the present paper is to verify the predominance of a monetary or fiscal dominance regime in Brazil in the post-Real period. The analysis is based on a model proposed by Canzoneri, Cumby and Diba (2000). This model proposes that there is a relationship between the public debt/GDP and primary surplus/GDP series by using the vector autoregression (VAR) framework and analyzing the impulse response functions. Another aim is the extension of the article written by Muscatelli et al. (2002) about the interactions between monetary and fiscal policies using the Markov-switching vector autoregressive model (MS-VAR) introduced by Krolzig (1997), since the relationship between these policies may not be constant over time. In conclusion, the macroeconomic coordination between monetary and fiscal policies in Brazil was virtually a substitute policy throughout the study period, with a predominantly monetary regime, in opposition to the non-Ricardian policies of the Fiscal Theory of The Price Level.<br>O objetivo do presente artigo é verificar a existência de um regime de dominância monetária ou fiscal no Brasil no período pós-Plano Real. A análise é baseada em um modelo proposto por Canzoneri, Cumby e Diba (2000). O procedimento modela relação entre as séries de dívida publica/PIB e superávit primário/PIB usando um do vetor auto-regressivo (VAR) e analisa as funções de impulso-resposta. Um outro objetivo é a extensão do artigo escrito por Muscatelli et al. (2002) sobre as interações entre políticas monetária e fiscal, usando agora o modelo do vetor auto-regressivo com mudanças de markov (MS-VAR) introduzido por Krolzig (1997), uma vez que a relação entre essas políticas pode não ser constante ao longo do tempo. A conclusão mostra que a coordenação macroeconômica entre políticas monetária e fiscal no Brasil foi virtualmente uma política substituta durante o período estudado, com um regime monetário predominante em oposição às políticas não-ricardianas da Teoria Fiscal do Nível de Preços

The Fiscal Theory of the Price Level and the Interaction of Monetary and Fiscal Policies: The Brazilian Case

“…They use unit root tests and VAR to conclude that the data are consistent with a Ricardian regime. Fialho and Portugal (2005), using monthly data from 1995:1 to 2003:9, also follow Canzonery et al (2001). They apply the approach of Muscatelli et al (2002) to investigate the interactions between the monetary and fiscal policies using the Markov-switching vector autoregressive model (Krolzig, 1997).…”

“…If the monetary authority responds to higher inflation with sufficiently higher nominal interest rates, a vicious circle is formed." Fialho and Portugal (2005) examine the predominance of a monetary or fiscal dominance regime in Brazil in the post Real Plan period. They argue that the macroeconomic coordination between monetary and fiscal policies in Brazil was virtually a substitute and predominantly monetary policy during the period.…”

Testing the Fiscal Theory of Price Level in Case of Pakistan

“…This may result in having positively correlated surpluses but inconclusive impulse-response analysis. It would be appropriate to apply VAR techniques that allow to identify when regimes are switching [Leeper and Troy (2006)] for a theoretical model, and for an application to Brazil [Fialho and Portugal (2005)]. The use of different econometric tests and approaches to underpin the relative importance of monetary and fiscal determinants of inflation should improve the reliability of the results.…”

Fiscal and Monetary Anchors for Price Stability: Evidence From Sub-Saharan Africa

“…This may result in having positively correlated surpluses but inconclusive impulse-response analysis. Under these cases it would be appropriate to apply VAR techniques that allow to identify when regimes are switching, which is beyond the scope of this paper: see Leeper and Troy (2006) for a general model, and for an application to Brazil, Fialho, and Portugal (2005). 37 The limited sample size of public debt for the SSA region undoubtedly reduces the statistical power of these econometric tests.…”

“…To the best of our knowledge, this is the first attempt to test empirically the predictions of the FTPL for a large sample of Sub-Saharan African countries. Previous empirical studies of the FTPL included:Canzoneri et al (2001), andSala (2004) for the USA;Fialho and Portugal (2005),Loyo (1999), andTanner and Ramos (2002) for Brazil; andZoli (2005) for a number of emerging markets.7 In countries with thin capital markets, and inefficient tax systems, such it is found in the SSA region, the recourse to seigniorage to finance government deficits is typically higher. SeeGrilli, Masciandaro, and Tabellini (1991).…”