Twenty-Five Years of Fiscal and Monetary Regimes in Brazil: What have we Learned?

• In Event: Fiscal Institutions and Capacity

Abstract

This article examines the coordination between monetary and fiscal policies over twenty-five years, from the implementation of the Macroeconomic Tripod to the establishment of the Novo Arcabouço Fiscal in 2023. Using monthly data spanning January 2003 to December 2023, the empirical strategy combines two distinct time-series methodologies. Threshold Autoregressive (TAR) models identify a tipping point of 33.8% of GDP in the relationship between public debt and Selic rate, and a threshold of the 3.3% in the nexus between the primary balance and Selic rate. These results suggests that Brazil enters a state of weak monetary dominance when public debt exceeds the first threshold, and the primary balance falls below the second. Additionally, models estimated via Bayesian Time Variant Coefficient Autoregressive Vector (BTVC-VAR) highlight some episodes of fiscal discretion – such as during the New Macroeconomic Matrix or the post-pandemic period – that contributed to weak monetary dominance. Conversely, periods of adherence to fiscal rules, such as during the Macroeconomic Tripod or under the Teto de Gastos framework, provided relief for the Central Bank, enabling it to achieve inflation targets at a lower cost in terms of interest rates.

Author

• Benito Salomão, basalomao@benitosalomao.com.br