and bad, that own-source taxes are highly pro-cyclical, and that revenue-sharing and discretionary transfers from the central government are either a-cyclical or pro-cyclical (pro-cyclical in both the Brazilian and Argentine cases).

Rocha and Giuberti (2005) study the behavior of the Brazilians states’ fiscal policy seeking to answer two questions: (i) Is state fiscal policy pro-cyclical or anti-cyclical? And: (ii) Is state fiscal behavior asymmetric during contractions and expansions? The authors tackle these questions using a fiscal reaction function framework for the period 1997-2003 (annual data). Within this framework the authors assess the sensitivity of the states’ primary surplus to the states’ stock of consolidated debt while controlling for the cyclical component of output. According to their results, the states’ fiscal policies have been pro-cyclical with some evidence of being asymmetric as well (i.e. more pro-cyclical during expansions), but the authors also found that this result was no longer accurate after the introduction of the Fiscal Responsibility Law in 2000. However, one key element not mentioned by the authors is the positive and significant coefficient associated with the states’ stock of consolidated debt, which would suggest that states increase their primary surplus to match increases in state debt in order to meet the intertemporal budget constraint.

In addition, this paper benefits from related literature regarding the fiscal consolidation of the Brazilian states. Blanco (2001) uses measures of fiscal impulse to identify and characterize the states’ fiscal stance during the period 1985-1997. According to the author’s results, it was not possible to identify empirical regularities (stop-and-go policies) for most of the Brazilian states. However, after 1994 more cases of fiscal expansion were observed. In addition, the author assesses the effects of political and institutional characteristics (e.g. the degree of competitiveness of the political system, the degree of fragmentation in political representation, the degree of political participation among the populace, and the degree of political similarity between the state and federal administrations) on the fiscal behavior of the Brazilian states in terms of their primary expenditures. After controlling for economic characteristics, political economy variables like the participation rate, the degree of fragmentation, and the similarity between state and federal administrations would have a statistically significant effect on states’ primary expenditures. Rocha and Rocha (2003) attempt to establish which state characteristics determine the probability that fiscal adjustments, once made, will remain in place. After controlling for economic variables (e.g. the ratio of tax revenue to current revenue, the ratio of personnel expenditures to current revenues, and the number of previous fiscal adjustments), the authors find that the polarization of preferences towards political parties (participation of leftist parties in the Legislative Assembly) and the permanence in power (proxy for reelection) are the key political factors that explain the continuation of fiscal adjustment episodes.

This paper builds upon these previous analyses to extend and complement the empirical evidence of budget cyclicality for the Brazilian states. The questions it poses are addressed using both a time-series and a cross-section dimension at the Brazilian state level for the period 1991-2006, which will make it possible to assess the degree of state budget pro-cyclicality while taking into account state characteristics (e.g. size and 4