The time-(in)variant interplay of government spending and private consumption in Brazil

Abstract

This paper analyzes the relationship between government spending and private consumption in Brazil through an application of a VAR with time-varying parameters and stochastic volatility, estimated with Bayesian simulation over the 1996:Q1-2014:Q2 period. The findings reveal that fiscal policy is indeed effective in stimulating GDP and private consumption, which characterizes the presence of positive Keynesian multipliers. However, these positive effects are only sustained on the short-run. Also, stochastic volatility seems to have decreased from 2000 onwards, suggesting that Brazil has steadily improved itsmacroeconomic stability after the adoption of the inflation-targeting framework and the Fiscal Responsibility Law.