Effects of discretionary fiscal policy and fiscal communication on fiscal credibility: Empirical evidence from Brazil

Since empirical evidence suggest fiscal credibility is important to the expectations formation process related to macroeconomic variables, it is important to identify the policies able to improve or deteriorate fiscal credibility. Once the adoption of discretionary fiscal policies can lead to higher public debt and budget imbalances, and to the extent that fiscal communication is important to improve fiscal transparency, this paper seeks to answer the following questions: Does the adoption of discretionary fiscal policies harm fiscal credibility? Does fiscal communication improve fiscal credibility? The study is the first to investigate whether fiscal communication and the adoption of discretionary fiscal policy (captured by the fiscal impulse) affects fiscal credibility in an important developing country (Brazil). The results indicate the adoption of discretionary fiscal policies harms fiscal credibility, and fiscal communication plays an important role in the task of improving fiscal credibility.