An RBC model of the Brazilian economy with stylized fiscal shocks

Pereira, Rodrigo M

doi:10.5935/0034-7140.20210024

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Revista Brasileira de Economia

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Artigos • Rev. Bras. Econ. 75 (04) • Oct-Dec 2021 • https://doi.org/10.5935/0034-7140.20210024 copy

An RBC model of the Brazilian economy with stylized fiscal shocks^* * I benefited from the comments of Helano Dias, Ricardo Cavalcanti, and an anonymous referee. I also received valuable inputs from the participants of IPEA/Rio macroeconomics seminars.

Authorship SCIMAGO INSTITUTIONS RANKINGS

This paper builds a real business cycle (RBC) model with government, aiming to replicate key features of the Brazilian economy. I first calibrate and then I use Bayesian methods to estimate the model for Brazil, with 20 years of quarterly aggregate data. Contrary to the conventional knowledge, I find mixed evidence on the pro-cyclicality of the fiscal policy in Brazil. Moreover, the results suggest that tax rate changes have been used to counter changes in the level of government indebtedness, however in a small degree if compared to other international evidence.

Keywords
RBC model; fiscal policy; Bayesian estimation

	Standard Deviations		Correlation with Output	Autocorrelation
	%	Relative to Output	Correlation with Output	Autocorrelation
Output	2.878	1.000	1.000	0.749
Consuption	2.870	0.997	0.877	0.755
Government Consumption	3.938	1.368	0.660	0.290
Investment	8.990	3.123	0.744	0.532
Hours	3.101	1.077	0.384	0.577
Primary Surplus	134.256	46.642	0.303	0.026
Nominal Interest Rates	18.850	6.549	--0.328	0.699

	Standard Deviations		Correlation with Output	Autocorrelation
	%	Relative to Output	Correlation with Output	Autocorrelation
Output	2.863	1.000	1.000	0.883
Consuption	2.179	0.761	0.712	0.990
Government Consumption	3,934	1.374	0.189	0.487
Investment	10,976	3.834	0.827	0.758
Hours	2,911	1.017	0.743	0.807
Primary Surplus	53,369	18.641	0.082	0.573
Nominal Interest Rates	106.5	37.192	-0.019	0.009

Parameter	Prior			Posterior
Parameter	Distribution	Mean	Std. Dev.	Mean	Confidence	Interval
ρα	Beta	0.5	0.25	0.9923	0.9852	0.9995
ρg	Beta	0.5	0.25	0.9409	0.9101	0.9723
ρτ	Beta	0.5	0.25	0.1376	0.0035	0.2601
$ρ_{ε}^{a}$	Inverse Gamma	1.0	inf	5.4596	4.7519	6.1588
$ρ_{ε}^{g}$	Inverse Gamma	1.0	inf	10.0837	8.1529	11.8917
$ρ_{ε}^{τ}$	Inverse Gamma	1.0	inf	4.7172	3.9056	5.5154
ξ^g	Normal	0.1	0.05	-0.0246	-0.0719	0.0244
ξ^τ	Gamma	0.03	0.05	0.0201	0.0101	0.0296

Fundação Getúlio Vargas Praia de Botafogo, 190 11º andar, 22253-900 Rio de Janeiro RJ Brazil, Tel.: +55 21 3799-5831 , Fax: +55 21 2553-8821 - Rio de Janeiro - RJ - Brazil
E-mail: rbe@fgv.br

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[1] ‡ rodrigo.pereira@ipea.gov.br

β	discount factor	0.988
α	capital income share	0.448
δ	capital depreciation rate	0.025
γ	inverse of the labor supply elasticity	0
τ	steady-state tax rate	0.32
s _b	steady-state debt/GDP ratio	2
ρa	AR(1) coefficient of A_t	0.84
ρg	AR(1) coefficient of gov. purchases	0.47
ρτ	AR(1) coefficient of the tax rate	0.8
ξτ	tax rate response to gov. indebtedness	0.047
ξg	gov. spending response to lagged output	0.12
ρa	standard deviation of ε^a	0.608
ρg	standard deviation of ε^g	3,421
ρτ	standard deviation of ε^τ	1,581

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An RBC model of the Brazilian economy with stylized fiscal shocks* * I benefited from the comments of Helano Dias, Ricardo Cavalcanti, and an anonymous referee. I also received valuable inputs from the participants of IPEA/Rio macroeconomics seminars.

An RBC model of the Brazilian economy with stylized fiscal shocks^* * I benefited from the comments of Helano Dias, Ricardo Cavalcanti, and an anonymous referee. I also received valuable inputs from the participants of IPEA/Rio macroeconomics seminars.