Is Fiscal Policy Effective in Brazil? An Empirical Analysis

Abstract

The main goal of this paper is to investigate the effectiveness of fiscal policy in Brazil. With a sample spanning from 1997 to 2014, we are not able to obtain evidence of the relevant impacts of fiscal stimuli on output, even when altering both the methodology and the model specifications. Our most robust estimate of the government spending fiscal multiplier is approximately 0.5. Higher multipliers are reported using Threshold Vector Autoregression (TVAR) and other approaches, but they are not robust because of specifications issues, i.e., failure to accept the null hypothesis in the specification tests. Finally, we discuss plausible explanations for such ineffectiveness of fiscal policy. Among several factors highlighted by the economic literature, we suggest that the consistent increases in Brazilian government expenditure undermine the importance of fiscal shocks. This effect could explain the fiscal conundrum manifested in Brazil.