Forecasting Brazilian GDP Under Fiscal Foresight and Nonfundamentalness with a Noncausal Fiscal VAR

45 Pages Posted: 5 Jan 2022

See all articles by Luan Borelli

Luan Borelli

Institute of Applied Economic Research (IPEA); FGV/EPGE Escola Brasileira de Economia e Finanças

Christian Vonbun

Institute of Applied Economic Research (IPEA)

Date Written: January 3, 2022

Abstract

Due to the occurrence of fiscal foresight, conventional fiscal VAR models are naturally inclined to suffer from the phenomena of nonfundamentalness and noncausality, which may imply biased estimates. These problems have been widely identified in the fiscal literature, however until recently disregarded in most of the Brazilian fiscal VAR research. In order to fill this gap, we estimate a noncausal fiscal VAR model for Brazil — which addresses the misspecification arising from these problems — and use it to forecast Brazilian GDP. The results indicate that the noncausal VAR has better forecasting performance than the conventional purely causal VAR, when considering the “typical” Brazilian fiscal VAR dataset. This suggests that fiscal expectations have a crucial role in determining the dynamics of Brazilian GDP.

Keywords: VAR, fiscal foresight, nonfundamentalness, noncausality

JEL Classification: E62, H30, C53

Suggested Citation

Borelli, Luan and Vonbun, Christian, Forecasting Brazilian GDP Under Fiscal Foresight and Nonfundamentalness with a Noncausal Fiscal VAR (January 3, 2022). Available at SSRN: https://ssrn.com/abstract=3999650 or http://dx.doi.org/10.2139/ssrn.3999650

Luan Borelli (Contact Author)

Institute of Applied Economic Research (IPEA) ( email )

Av. Pres. Antonio Carlos , 51 - 17 andar
Rio de Janeiro, RJ, 20020-010
Brazil

FGV/EPGE Escola Brasileira de Economia e Finanças ( email )

Praia de Botafogo 190/1125, CEP
Rio de Janeiro RJ 22253-900
Brazil

Christian Vonbun

Institute of Applied Economic Research (IPEA) ( email )

Av. Pres. Antonio Carlos , 51 - 17 andar
Rio de Janeiro, RJ, 20020-010
Brazil

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