Is fiscal policy effective in Brazil? An empirical analysis

Abstract

The main goal of this paper is to determine the effectiveness of fiscal policy in Brazil. With a sample from 1997 to 2014, we are not able to obtain the relevant impact of fiscal stimuli on output, even when altering both the methodology and the model specifications. Our more robust estimate of the government spending fiscal multiplier is approximately 0.5. Higher multipliers are reported using TVAR and other approaches and specifications, although they are biased for outliers and lack of robustness. We were not able to find any statistically significant response of the output to tax changes, but changes in output appear to generate tax revenue. Finally, we discuss plausible explanations for such ineffectiveness of fiscal policy. Among several factors highlighted by the economic literature, we suggest that the level of the government spending undermines the importance of fiscal shocks. That would explain the type of fiscal conundrum manifested in Brazil.