Pro-Cyclical Fiscal Policy in Brazil: Evidence from the States

30 Pages Posted: 20 Apr 2016

Date Written: December 1, 2009

Abstract

The empirical literature on budget cyclicality has generally focused more on assessing the degree of pro-cyclicality in federal (central government) revenues and expenditures and less on budget cyclicality at the sub-national level in multi-tiered systems. This paper attempts to contribute to the literature on budget cyclicality by examining how sub-national fiscal revenues and expenditures are linked to the business cycle in Brazil, particularly after the introduction of the Fiscal Responsibility Law. It explains the degree of pro-cyclicality across Brazilian states, and assesses whether intergovernmental transfers help to stabilize statesÂ’ finances. These issues are addressed using both a time-series and a cross-section dimension at the Brazilian state level for the period 1991-2006. The empirical evidence suggests the existence of a pro-cyclical fiscal policy in Brazil at the state level. However, the introduction of the Fiscal Responsibility Law helped to reduce Brazilian statesÂ’ spending-side pro-cyclicality. For the Brazilian states, the main source of the observed pro-cyclicality is found in the behavior of tax revenues directly collected by the state governments. Intergovernmental transfers (federal transfers to the states) are not associated with changes in gross state product, but they are pro-cyclically aligned with national gross domestic product, which could amplify the pro-cyclical behavior of sub-national expenditures.

Keywords: Subnational Economic Development, Debt Markets, Access to Finance, Banks & Banking Reform, Fiscal Adjustment

Suggested Citation

Arena, Marco and Revilla, Julio E., Pro-Cyclical Fiscal Policy in Brazil: Evidence from the States (December 1, 2009). World Bank Policy Research Working Paper Series, Vol. , pp. -, 2009. Available at SSRN: https://ssrn.com/abstract=1527334

Marco Arena (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Julio E. Revilla

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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