Fiscal reaction, budget rigidity and the sustainability of public debt in Brazil: an approach using MS-VECM
DOI:
https://doi.org/10.1590/1980-53575214fwsKeywords:
Fiscal stainability, Budget rigidity, Policies coordination, MS-VECM, Fiscal reactionAbstract
There is a growing concern about debt sustainability, not just related to distributional effects of public policies, but also to coordinate fiscal and monetary policies, and to avoid crisis. This research aimed to evaluate the sustainability of the fiscal policy conduction in the period from 1999 to 2021, using the model proposed in Bohn (2007). The use of Markov Switching-VECM, Markov Switching-OLS Regressions, and moving windows regressions is justified due non-linearities and peculiarities of data. The results are method and sample dependent. When discretionary and mandatory spending are used as control variables, the fiscal reaction points out to a poor quality of debt sustainability until 2009. Since then, the fiscal policy conduction became unsustainable, being highly affected by budget rigidity. The evidences in this paper clarifies that attacking budget rigidity is paramount when designing a fiscal framework capable of reducing GDP uncertainty and country’s vulnerability to crisis.
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