This paper studies the fiscal policy in Brazil accounting for the influence of monetary policy. The CPI inflation rate and the interest outlays as a ratio of GDP represent state variables in the determination of the sequence of primary surpluses by the Treasury. Hence, the empirical model of the fiscal reaction function was estimated using threshold regressions. In the light of the empirical evidence, it is no surprise the tolerance of the government with lower surpluses. It is noteworthy that reductions in the SELIC rate have mixed effects, since the lower burden of interest expenses allow for lower surpluses, while more inflation makes the fiscal policy persistent. The inverse occurs when the Central Bank reduces the liquidity in the economy.
primary surpluses; net public debt; inflation rate; interest outlays; and threshold regressions
