On the time-frequency effects of macroeconomic policy on growth cycles in Brazil

Abstract

This paper adds to the literature on the growth cycle in Brazil by addressing instrumentalized co-movements between the quarterly variation of real Gross Domestic Product (GDP) per capita versus net debt to GDP, primary balance to GDP, inflation, official interest rate, household, and enterprise credit to GDP from 2004q1 to 2022q4. The authors use wavelet algorithms to process data by decomposing each time series as a wave-shaped function of the position and scale, partial coherency to analyze time-frequency correlation, and partial phase difference and gain to find and measure the lead-lag relationships. Summarizing the short-run main findings, in periods of non-recession, primary balance uses to leads in-phase growth cycles, while inflation and household credit use to lead out-of-phase growth cycles. During recessions, there is a positive role played by the enterprise credit and a negative leadership of interest rates on the growth cycle. According to the results, Brazil could reach a short-run fiscal equilibrium by increasing net domestic debt under control associated with a credible flow of fiscal surplus able to pay the service of the new debt pattern, with lower inflation and interest rates and thus not compromising economic growth.