Brazilian Fiscal And Monetary Policy: Balancing Budgetary Rigidity And Economic Sustainability
Authors: Nunes Ricardo Da Costa 
Published: November 2024

Background: This study examines Brazil's fiscal framework, focusing on the rigidity imposed by revenue earmarking and its effects on public debt management and economic sustainability. The paper reviews the evolution of macroeconomic theories, from Keynesianism to monetarism, and their influence on Brazilian fiscal and monetary policy formulation. It explores rational expectations theory and its impact on policy efficacy, particularly under budgetary rigidity, while also assessing Keynesian and monetarist applications in the Brazilian context. Further, contemporary debates such as those surrounding the Phillips Curve are discussed, alongside an analysis of Brazil's fiscal and monetary policy instruments. An econometric analysis evaluates the relationship between public expenditure and GDP, with robustness checks applied to validate the model. The study concludes that achieving sustainable fiscal balance in Brazil may require structural reforms to increase budget flexibility, enabling more adaptive debt management and strategic investment. Comparative studies on flexible fiscal models in similar economies are recommended to expand these insights. Materials and Methods: This study uses a quantitative approach to examine the relationship between public expenditure and GDP in Brazil. Data on fiscal variables, including public debt, interest rates, inflation, and GDP, were sourced from government databases. A multiple regression model with a quadratic term for public expenditure was applied to capture non-linear effects. Diagnostic tests for heteroscedasticity, autocorrelation, and model specification were conducted to ensure robustness, providing a comprehensive framework for assessing the impacts of fiscal rigidity and public spending on economic growth. Results: The findings align with academic theory, showing a non-linear relationship where moderate public spending boosts GDP, but excessive spending has diminishing returns, consistent with Keynesian and neoclassical views. Control variables (public debt, interest rates, inflation) were not significant, supporting theories that these may have limited direct impact on short-term growth. Diagnostic tests confirmed the model's robustness. Conclusion: The study concludes that Brazil's high debt-to-GDP ratio, elevated current expenditures, and budgetary rigidity limit the government's capacity to expand public spending as an economic stimulus. This constraint aligns with classical and neoclassical perspectives, which do not endorse extensive state intervention. Such fiscal expansion would be unfeasible within a Keynesian framework due to high public debt and limited public resources. The econometric results corroborate these findings, revealing that while moderate public spending positively impacts GDP, excessive spending yields diminishing returns, reinforcing the argument against unchecked fiscal expansion. The insignificance of control variables, such as public debt, interest rates, and inflation, suggests the limited direct impact of additional fiscal stimulus on short-term growth under current conditions. The model's robustness supports the reliability of these insights, pointing to the need for fiscal reforms that enhance budget flexibility, enabling a balanced fiscal approach without further increasing public debt