Sustainability of Brazilian fiscal policy, once again: corrective policy response over time

Abstract

This paper estimates a fiscal reaction function for Brazil and investigates how the
government´s fiscal reaction has changed over time when controlling for cyclical variations
in output and the relative participation of indexed debt. Using monthly data
since 1991, we estimate a rolling reaction function with a one observation step and a
sample-window of 12 observations. Our results indicate that the government´s fiscal
response has been such that a one percent increase in the debt-GDP ratio can be associated
to an average increase in the primary surplus of approximately 0.096% over GDP
or 9.6 basis points; the government´s fiscal reaction has become more stable but less
responsive to the debt-income level after 2000 and assumed a declining trend after 2006.