Appendix – Data
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)| false Garcia, M.and Rigobón, R., 2005, “ A Risk Management Approach to Emerging Markets’ sovereign debt sustainability with an application to Brazilian data,” in ( Giovazzi, F., Goldfajn, I.and Herrera, S. eds), Inflation targeting, debt and the Brazilian experience 1999 to 2003, MIT Press, Cambridge.
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)| false Issler, J. V.and L. R. Lima, 1998, “ Public Debt Sustainability and Endogenous Seigniorage in Brazil: Time-Series Evidence From 1947-92,” Economics Working Papers (Ensaios Economicos da EPGE) 334, Graduate School of Economics, Getulio Vargas Foundation( Brazil).
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Tanner, E., and A. Ramos, 2003, “Fiscal Sustainability and Monetary versus Fiscal Dominance: Evidence from Brazil, 1991–2000,”Applied Economics (May), Vol. 35, Issue. 7, pp. 859–73.
Tanner, E., and I. Samake, 2008, “Probabilistic Sustainability of Public Debt: A Vector Autoregression Approach for Brazil, Mexico, and Turkey”, IMF Staff Papers Vol. 55, No. 1, pp. 149-182.
Economics Department, University of Melbourne and IMF Fiscal Affairs Department, respectively. The authors thank the IMF Western Hemisphere Regional Studies Division for their support of this research, and Ana Corbacho, Marcos Chamon, Ben Clements, Irineu de Carvalho, Gabriel Di Bella, Marcio Garcia, Steve Phillips, Rodrigo Valdés, Francisco Vázquez, David Vegara, and WHD seminar participants for helpful comments.
For example, that study uses a “near VAR” to project oil prices independently of country fundamentals.
For example, Goldfajn (1998), Issler and Lima (1998), Goretti (2005), Goldstein (2003), Tanner and Ramos (2003), Giavazzi and Missale (2004), Garcia and Rigobón (2005), Celasun, Debreu and Ostry (2006), Penalver and Thwaites (2006), Tanner and Samake (2008), and Frank and Ley (2009).
As to the impact of fiscal policy on interest rates in other studies, Penlaver and Thwaites (2006), for example, estimates a vector autoregression on quarterly Brazillian data from 1999 Q2 - 2005 Q1 and finds that a one percent increase in the primary balance lowers the domestic interest rate by 6.2 percent.
The negligible impact of structural changes in the primary balance on GDP growth found here is consistent with Romer and Romer (2010) – discussed below – which fails to find large output costs from tax policy changes intended to reduce the U.S. budget deficit, but could have expansionary effects through long-term interest rates. The empirical results presented do not parse the impact of changes in the structural primary balance in Brazil into revenue or expenditure measures, but does find a strong impact through real domestic interest rates rather than growth.
In addition to its direct impact on domestic real interest rates, an improved fiscal balance may have important second-round effects on these borrowing costs by allowing policy makers to relax some of the financial restrictions historically implemented in response to deteriorating conditions and arising in the wake of fiscal crises. Finding an instrument to identify these effects is beyond the scope of this study.
For example, in 1997, the UK set two fiscal rules (the Sustainable Investment and the Golden Rule) that were intended to limit the level and purpose of government borrowing. In the Budget Report and Pre-Budget Report, the economic forecast is presented by the UK authorities in terms of forecast ranges, based on alternative assumptions about the supply-side performance of the economy. See HM Treasury (2008).
As shown by Bohn (1998), a positive estimated response of the primary balance to public debt is sufficient to ensure long-run solvency.
Supremum tests for multiple structural breaks in unknown locations finds no breaks in the residuals at conventional significance levels. The implementation of the Andrews (1993) test used here is based on Bai and Perron (1998). At better than 5 and 1 percent significance levels, the sequential break test found no structural breaks.
This estimation period avoids high volatility, for example, high domestic real interest rates in the early 1990s. Throughout the study, the annual interest rate is taken as the compound average of the monthly interest rates during the year to avoid biases introduced during high inflation periods.
Issuing debt to offset reserve and other asset accumulation is a recent phenomenon, since approximately 2005, and as the authorities’ strategy for intervention is not public, a stylized rule is used here (without loss of generality to the reported simulations). For example, from 2005-09 Brazil accumulated roughly US$185 billion in central bank reserves, while observing a nearly sixty percent cumulative appreciation in the real effective exchange rate, and increasing its central bank claims on the central government by approximately 1 percent of GDP per year (unevenly, with greater accumulation of debt and reserves in recent years and more appreciation earlier on).
Estimates presented are robust to including both a fiscal feedback to the real exchange rate equation in system (1.23), and a squared lagged real exchange rate term.