An analysis of the interaction between monetary and fiscal policies in Brazil

This paper examines the interaction between monetary and fiscal policy rules in Brazil using quarterly data ranging from 2003 to 2017. Based on a New Keynesian macro model, a GMM system is applied and, as a robustness exercise, a Vector Autoregression (VAR) estimation is performed. Regarding the Taylor rule, there is evidence of the Brazilian central bank holding a dual mandate, i.e., seeking price stability without ignoring economic activity variables. Therefore, monetary policy seems to be countercyclical. As for the fiscal policy rule, the dynamics of economic activity leads to a decrease in the public sector borrowing requirement (PSBR) as a share of GDP, which is an indication of a countercyclical fiscal policy and coordination of economic policies. However, this may indicate only that GDP grows faster than PSBR, and not that the latter is decreasing. As a result, it is not possible to assure that the Brazilian fiscal policy is actually coordinated with the country's monetary policy.