Fiscal Reaction to Increase Public Debt: An analysis for the Brazilian States

Abstract

The study proposes an investigation into the ability of the Brazilian states to keep sustainable the trajectory of its public debt that, in spite of the Fiscal Restructuration Proposals, as the Law 9.496/97 and the Law of Fiscal Responsibility, increased between 2006 and 2011. The methodology adapted the fiscal reaction function of Bohn (2007) to a panel data structure and includes the possibility of threshold effects, such as in Hansen (1999). Thus, the reactions by the states with higher levels of debt were allowed be different from the others. The results showed that, as a rule, there is no active fiscal policy of the states in terms of generating primary surplus against the increase of the public debt.