A time-varying fiscal reaction function for Brazil

Abstract

This paper evaluates the sustainability of public debt in Brazil using monthly data from January 2003 to June 2016, based on the estimation of fiscal reaction functions with time-varying coefficients. Three estimation methods are considered: Kalman filter, penalized spline smoothing and time-varying cointegration. Besides indicating that the reaction of the primary deficit to variations in the debt/GDP ratio declined over most of the period analyzed, all these methods lead to the conclusion that the Brazilian public debt, given the parameters then in force, reached an unsustainable trajectory in the last years of the sample.