Fiscal and monetary policy rules in Brazil: empirical evidence of monetary and fiscal dominance

Abstract

Based on the hypothesis that the rules of monetary and fiscal policy in Brazil may have been subject to different regimes, the present study applies the Leeper model (1991 and 2005) to identify the chronology of policy regimes in terms of their active and passive character. The policy rules are estimated using the Markov-switching model, with a monthly database from November 2002 to December 2015, in which the regimes are endogenously determined. The results obtained indicate that fiscal dominance occurred in 2010 and between 2013 and 2014, while monetary dominance marked much of 2003 and the period 2005–2007. The model also seeks to explain why the inflation rate continued to rise during 2015 even though Central Bank of Brazil took an active monetary policy stance that year.