The Interaction of Monetary and Fiscal Policy: The Brazilian Case


We tested, empirically, whether the Brazilian fiscal policy for the period between 1995:I to 2008:III was active or passive. To analyze fiscal policy transmission mechanisms, we estimated functions by which the public debt/GDP ratio affects investment, primary surplus, output gap and the demand for money. The ratio of public debt to GDP was found to be statistically significant, positively affecting the demand for money and the primary surplus, whereas it was found to negatively affect the level of investment and the output gap. We conclude that the Brazilian regime was non-Ricardian in the context of fiscal dominance.

Share and Cite:

T. Moreira, F. Soares, A. Sachsida and P. Loureiro, "The Interaction of Monetary and Fiscal Policy: The Brazilian Case," Modern Economy, Vol. 2 No. 2, 2011, pp. 114-123. doi: 10.4236/me.2011.22016.

Conflicts of Interest

The authors declare no conflicts of interest.


[1] E. M. Leeper, “Equilibria under ‘Active’ and ‘Passive’ Monetary and Fiscal Policies,” Journal of Monetary Economics, Vol. 27, No. 1, February 1991, pp. 129-147.
[2] J. T. Araújo and M. A. C. Martins, “Economic Growth with Finite Life-times,” Economics Letters, Vol. 62, No. 3, March 1999, pp. 377-381. doi:10.1016/S0165-1765(99)00013-0
[3] R. D. Kneebone, “On Macro-Economic Instability under a Monetarist Policy Rule in a Federal Economy,” The Canadian Journal of Economics, Vol. 22, 1989, pp. 673-685.
[4] W. M. Scarth, “Macroeconomics: An Introduction to Advanced Methods,” Harcourt Brace & Company, Toronto and Orlando, 1996.
[5] R. J. Barro, “Are Government Bonds Net Wealth?” The Journal of Political Economy, Vol. 82, No. 6, November-December1974, pp. 1095-1117. doi:10.1086/260266
[6] T. J. Sargent and N. Wallace, “Some Unpleasant Monetarist Arithmetic,” Quarterly Review, Federal Reserve Bank of Minneapolis 5, 1981, pp. 1-17.
[7] T. J. Sargent, “Reaganomics and Credibility, Rational Expectations and Inflation,” Harper and Row, New York, 1986.
[8] O. Blanchard, “Fiscal Dominance and Inflation Targeting: Lessons from Brazil,” Working Paper No. 10.389, NBER, March 2004.
[9] M. C. A. Martins, “A Nominal Theory of the Nominal Rate of Interest and the Price Level,” The Journal of Political Economy, Vol. 88, No. 1, February 1980, pp. 174-185. doi:10.1086/260853
[10] M. Woodford, “Interest and Prices,” Princeton University Press, Princeton, 2003.
[11] C. A. Sims, “A Simple Model for Study of the Price Level and the Interaction of Monetary and Fiscal Policy,” Economic Theory, Vol. 4, No. 3, 1994, pp. 381-399. doi:10.1007/BF01215378
[12] M. Woodford, “Monetary Policy and Price-level Determinacy in a Cash-in-Advance Economy,” Economic Theory, Vol. 4, No. 3, 1994, pp. 345-380. doi:10.1007/BF01215377
[13] M. Woodford, “Price level Determinacy without Control of a Monetary Aggregate,” Working Paper No. 5.204, NBER, 1995.
[14] M. Woodford, “Control of the Public Debt: a Requirement for Price Stability?” In: G. Calvo and M. King, Eds, The Debt Burden and Monetary Policy, Macmillian, London, 1997.
[15] M. Woodford, “Fiscal Requirements for Price Stability,” Journal of Money, Credit and Banking, Vol. 33, August 2001, pp. 669-728. doi:10.2307/2673890
[16] J. H. Cochrane, “A Frictionless View of the US Inflation,” Working Paper No. 6.646, NBER, 1998.
[17] J. H. Cochrane, “Long Term Debt and Optimal Policy in the Fiscal Theory of the Price Level,” Econometrica, Vol. 69, No. 1, January 2001, pp. 69-116. doi:10.1111/1468-0262.00179
[18] J. H. Cochrane, “Money and Stock,” 2001 (Unpublished).
[19] D. Hamilton, “Time Series Analysis,” Princeton University Press, Princeton, 1994.
[20] J. Johnston and J. DiNardo, “Econometric Methods,” MacGraw-Hill, New York, 1997.
[21] W. Greene, “Econometric Analysis,” Prentice Hall, Upper Saddle River, 2000.
[22] G. S. Maddala, and I. Kim, “Unit Roots: Cointegration, and Structural Change,” Cambridge University Press, Cambridge, 2000.
[23] C. Hsiao, “Statistical Properties of the Two-stage Least Squares Estimator under Cointegration,” The Review of Economic Studies, Vol. 64, No. 3, 1997, pp. 385-398. doi:10.2307/2971719
[24] C. Hsiao, “Cointegration and Dynamic Simultaneous Equations Models,” Econometrics, Vol. 65, No. 3, May 1997, pp. 647-670. doi:10.2307/2171757
[25] H. Bohn, “The Behavior of U.S. Public Debt and Deficits,” The Quarterly Journal of Economics, Vol. 113, No. 3, 1998, pp. 949-963. doi:10.1162/003355398555793
[26] W. Buiter and R. Patel, “Debt, Deficits and Inflation: An Application to the Public Finances of India,” Journal of Public Economics, Vol. 47, No. 2, March 1992, pp. 171-205. doi:10.1016/0047-2727(92)90047-J
[27] A. M. C. Lima and J. V. Issler, “A Hipótese das Expectativas na Estrutura a Termo de Juros no Brasil: uma Aplica??o de Modelos de Valor Presente,” Revista Brasileira de Economia, Vol. 57, No. 4, October-December 2003, pp. 873-898. doi:10.1590/S0034-71402003000400010
[28] T. B. S. Moreira, G. S. Souza and C. L. Almeida, “The Fiscal Theory of the Price Level and the Interaction of Monetary and Fiscal Policy: The Brazilian Case,” Review of Econometrics, Vol. 27, 2007, pp. 85-106.

Copyright © 2022 by authors and Scientific Research Publishing Inc.

Creative Commons License

This work and the related PDF file are licensed under a Creative Commons Attribution 4.0 International License.