A further deterioration of the Brazilian fiscal reaction in view of COVID-19

CAMPOS, EDUARDO LIMA; CYSNE, RUBENS PENHA; MADUREIRA, ALEXANDRE L.

doi:10.1590/0101-31572022-3286

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Brazilian Journal of Political Economy

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Articles • Brazil. J. Polit. Econ. 42 (3) • Jul-Sep 2022 • https://doi.org/10.1590/0101-31572022-3286 copy

A further deterioration of the Brazilian fiscal reaction in view of COVID-19^* * This study was ﬁnanced in part by the Coordenação de Aperfeiçoamento de Pessoal de Nível Superior - Brasil (CAPES) - Finance Code 001.

Uma nova deterioração da reação fiscal brasileira diante da Covid-19

Authorship SCIMAGO INSTITUTIONS RANKINGS

ABSTRACT

The fiscal reaction function measures how the government’s primary surplus reacts to the evolution of public debt. Campos and Cysne (2019bCampos, E. L., & Cysne, R. P. (2019b). An alert on the recent fall of the fiscal reaction in Brazil. Brazilian Journal of Political Economy, 39(2), 253-262. http://dx.doi.org/10.1590/0101-31572019-2976
http://dx.doi.org/10.1590/0101-31572019-... ) observed that the reaction function has been almost steadily decreasing since 2012 and it has turned from positive to negative values in 2017 and 2018. In the subsequent period, the improvement of some economic indicators led the fiscal reaction to a recovery. Nevertheless, in 2020, with the advent of COVID-19, health spending and emergency aids caused a sharp fiscal deterioration, leading the fiscal reaction coefficient to assume, again, negative values.

KEYWORDS:
Brazil; fiscal reaction; COVID-19; Debt/GDP ratio; fiscal sustainability; Kalman filter

Variables	Jan/16-DEC/19	Jan/20-Sep/20
SELIC Interest Rate (i)	9.15	3.09
Implicit Interest Rate (i*)	15.52	9.66
GDP % Growth (θ)	4.51	3.08
i-θ	4.64	0.01
i*-θ	11.02	6.58
Fiscal Reaction ρ (mean)	0.20	-2.13
Sustainability when SELIC rate is used	ρ - (i - θ) = - 4.43	ρ - (i - θ) = - 2.14
	Unsustainable	Unsustainable
Sustainability when implicit rate is used	ρ - (i* - θ)) = -10.81	ρ - (i* - θ) = -8.72
	Unsustainable	Unsustainable

Variable	Source	Link	Code
Primary Result of the Consolidated Public Sector	Central Bank	https://www3.bcb.gov.br/sgspub/localizarseries/localizarSeries.do?method=prepararTelaLocalizarSeries	5793
General Government Net Debt	Central Bank	https://www3.bcb.gov.br/sgspub/localizarseries/localizarSeries.do?method=prepararTelaLocalizarSeries	4536
Public Sector Net Debt	Central Bank	https://www3.bcb.gov.br/sgspub/localizarseries/localizarSeries.do?method=prepararTelaLocalizarSeries	4513
GDP	Central Bank	https://www3.bcb.gov.br/sgspub/localizarseries/localizarSeries.do?method=prepararTelaLocalizarSeries	4382
GDP Monitor	IBRE	https://portalibre.fgv.br/estudos-e-pesquisas/indices-de-precos/monitor-do-pib	-
Basic Interest Rate	Central Bank	https://www3.bcb.gov.br/sgspub/localizarseries/localizarSeries.do?method=prepararTelaLocalizarSeries	4189
Implicit Interest Rate	Central Bank	https://www.bcb.gov.br/estatisticas/historicoestatisticas	-
EMBI+	Ipeadata	http://www.ipeadata.gov.br/ExibeSerie.aspx?serid=40940&module=M	-
Rating Risk	S&P ratings	https://www.standardandpoors.com	-
Inflation	IBGE	https://www.ibge.gov.br/estatisticas/economicas/precos-e-custos/9256-indice-nacional-de-precos-ao-consumidor-amplo.html?=&t=downloads	9256
Exchange Terms	Funcex	http://www.funcexdata.com.br/	-

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A further deterioration of the Brazilian fiscal reaction in view of COVID-19* * This study was ﬁnanced in part by the Coordenação de Aperfeiçoamento de Pessoal de Nível Superior - Brasil (CAPES) - Finance Code 001.

Uma nova deterioração da reação fiscal brasileira diante da Covid-19

ABSTRACT

A further deterioration of the Brazilian fiscal reaction in view of COVID-19^* * This study was ﬁnanced in part by the Coordenação de Aperfeiçoamento de Pessoal de Nível Superior - Brasil (CAPES) - Finance Code 001.