Strategic fiscal and monetary interactions in the Brazilian economy

Abstract

This paper identifies the leadership structure of the game played by monetary and fiscal authorities in the Brazilian economy after the implementation of inflation targeting regime in 1999. A stylized small-scale New Keynesian model augmented with fiscal policy is estimated using Bayesian methods. I assume that monetary and fiscal authorities can act strategically under discretion in a non-cooperative setup and compare three different forms of games (i) simultaneous move; (ii) fiscal leadership; and (iii) monetary leadership. I find strong empirical support for the hypothesis that the Brazilian fiscal authority acts as a Stackelberg leader. The results obtained can shed some light on the improvement of policy design in the Brazilian economy.

Paulo da Fonseca

Adjunct Professor

I’m interested in Macro; Fiscal and monetary policy interactions; DSGE models; Heterogeneous agents New Keynesian models; Agent-based modeling and Computational Methods.