We develop a real business cycle model that includes the government sector and public capital, in order to analyze the effects of fiscal shocks over the business cycle and to account for the main stylized facts of postwar Brazilian fiscal policy (1950-2006). The model captures quite well the main characteristics of the fiscal variables along the business cycle, namely, the greater volatility of the government spending (consumption and investment) compared to the private sector spending and the procyclical behaviour of the fiscal policy. Although the tax burden is the fiscal variable that fluctuates less along the business cycle, it is the most important one to explain the output volatility, besides productivity.
real business cycle; fiscal policy; public capital
