Fiscal Rules, Automatic Stabilizers and Discretionary Fiscal Actions: Analyzing an Emerging Economy

Abstract

This article analyzes the nature of the fiscal rule in Brazil, over the period from January 2005 to July 2012, using a VEC model. The initial findings identify a (weak) fiscal rule, as nominal deficits react counter-cyclically to domestic public debt and inflation changes. However, when we isolate the discretionary component of the fiscal policy its pro-cyclical bias can be highlighted. The estimates contribute to understand the preliminary findings and why such a policy is not enough to impose a sustainable downturn movement on the public debt / GDP ratio in Brazil over the last years.