Expansionist fiscal adjustment: theoretical reflections on the brazilian experience

Abstract

The present study proposes to analyze the literature that surrounds the idea – contrary to Keynesian assumptions – that contractionary fiscal adjustments can somehow allow economies to recover and may even emerge from crises, such as the Great Recession of 2008-09. The starting point will therefore be a counterpoint between the two views, at first, in the theoretical field and later with an analysis of relevant works both in favor and against this hypothesis. This exposition attests that the circumstances for fiscal consolidations to become beneficial for economic activity are extremely rare and depend on a complex mix of other changes in interest rates and exchange rates. Based on this evidence, the study argues that austerity policies in public accounts are not only unable to help the country overcome the crisis, but are also at the heart of how the Brazilian economy reached the current critical situation.