Sustainability of the Brazilian public debt: An analysis using multicointegration

Abstract

According to Bohn (1995), conventional econometric analysis of sustainability, based on unit root tests on the government debt-to-GDP series or cointegration analysis between revenues and expenses, are inconclusive to verify the sustainability of the fiscal policy. This paper uses the multicointegration method to investigatethe validity of a long-term relationship between the Brazilian government`s accumulated revenues and expenses and its debt, all expressed as a proportion of GDP. Leachman et al. (2005) argue that this technique allows concluding about the sustainability or not of fi scal policy. The present work considers specificationsthat allow evaluating the reaction of both accumulated revenues and expenses to changes in the debt-to-GDP, using monthly data from December 1997 to June 2018. We conclude that the Brazilian fiscal policy was unsustainable over the study period, due to the excessive government spending and its growing trajectory, mainly at the end of the sample.