Fiscal Sustainability and Inflation Dynamics: The Case of Brazil

77 Pages Posted: 14 May 2024

See all articles by Pedro Carvalho

Pedro Carvalho

Stanford University, Department of Economics

Date Written: May 1, 2024

Abstract

This paper examines the relationship between expectations of fiscal sustainability and inflation in Brazil. I use Vector Autoregressions (VAR) to analyze inflation dynamics and plot impulse responses using empirical data from Brazil from 2001-2019. I also introduce sovereign Credit Default Swaps (CDS) as a signal of expected future fiscal sustainability and find a correlation between CDS premia and unexpected inflation, supporting a fiscal theory interpretation of inflation. This work builds on literature that highlights the interdependent role of fiscal and monetary policy in inflation stabilization by focusing on Brazil, a country with a notable history of fiscal and monetary policy changes.

Keywords: Inflation, monetary policy, fiscal policy, sovereign credit default swaps, fiscal theory of the price level, Brazil

Suggested Citation

Carvalho, Pedro R., Fiscal Sustainability and Inflation Dynamics: The Case of Brazil (May 1, 2024). Available at SSRN: https://ssrn.com/abstract=4824201 or http://dx.doi.org/10.2139/ssrn.4824201

Pedro R. Carvalho (Contact Author)

Stanford University, Department of Economics ( email )

Stanford, CA
United States

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