Fiscal Policy, Supply Shocks and Economic Expansion in Brazil from 2003 to 2007*

Abstract

This article has two objectives. The first is to show the impact of distortionary taxes during a period of the economic cycle in Brazil. The second is to show that an explanation for output to grow slower than productivity is the increase in taxes on productive factors: capital and labor. To attain these two objectives, we carried out a study comparing the Brazilian economy with simulated data from the neoclassical model of economic growth with and without distortionary taxes. The empirical results show that the model without taxes predicts stronger growth than observed between 2003 and 2007. This point was addressed using the neoclassical growth model with distortionary taxes. However, this model produces a lower output path than observed. Besides this, both models fail to appropriately account for the behavior of the labor market.