The Selic rate came down sharply from mid-2003 and during much of 2004, and from the last
quarter of 2008 to mid-2009. It then held steady at 8.65% until the first quarter of 2010 (subprime
mortgage crisis). From mid-2011 to mid-2013, the Selic declined considerably, in the context of a high
rate of inflation, around 6%. Although the interest rate then rose until the end of 2013 and remained
relatively stable in 2014, this rise was evidently not enough to slow the inflation rate. This may suggest
that monetary policy could have been more active, as these are indications of a passive monetary policy.
The empirical results presented suggest that, in the ex post analysis, there are indications of
coordination or attempted coordination between fiscal and monetary policies, as well as signs of lack of
coordination between them, especially when there is a clear conflict of interest between the two. As an
example of lack of coordination between fiscal and monetary policies, in mid-2013 the Central Bank of
Brazil began to reverse its successive cuts in the Selic rate and to gradually increase it to try to reduce
inflation. At the same time, the federal government continued to reduce the primary surplus in order to
boost economic activity, which put upward pressure on inflation. The results of this conflict of interest
between economic policies were recession, fiscal deterioration and high rates of inflation.
VII. Final remarks
This article has evaluated the monetary and fiscal policies implemented in Brazil in the period between
November 2002 and December 2015.
In this context, considering that monetary and fiscal policy rules
in Brazil may have undergone different regimes, the present study used the Leeper model (1991 and
2005) to establish the chronology of policy rules in terms of their active or passive nature.
Policy rules are estimated by means of a Markov-switching model in which the regimes are
generated endogenously. The results support the affirmation that fiscal dominance occurred in 2010
and between 2013 and 2014. Monetary dominance obtained for much of 2003 and in the period
2005–2007. During the rest of the period, monetary and fiscal policies were seen to be conducted
sometimes actively (2015) and sometimes passively (end-2003, 2004, 2008, 2009, 2011 and 2012).
CEPAL Review N° 135 • December 2021 99
Tito Belchior S. Moreira, Mario Jorge Mendonça and Adolfo Sachsida
Bibliography
Balbino, C., E. Colla and V. Teles (2011), “A política monetária brasileira sob o regime de metas de inflação”,
Revista Brasileira de Economia, vol. 65, No. 2, Rio de Janeiro, Getulio Vargas Foundation.
Bohn, H. (1998), “The behavior of U.S. public debt and deficits”, The Quarterly Journal of Economics, vol. 113,
No. 3, Oxford, Oxford University Press.
Carvalho, A. and P. Feijó (2015), Entendendo resultados fiscais: teoria e prática de resultados primário e
nominal, Brasilia, Gestão Pública.
Chib, S. (1996), “Calculating posterior distributions and modal estimates in Markov mixture models”, Journal
of Econometrics, vol. 75, No. 1, Amsterdam, Elsevier.
Clarida, R., J. Galí and M. Gertler (2000), “Monetary policy rules and macroeconomic stability: evidence and
some theory”, The Quarterly Journal of Economics, vol. 115, No. 1, Oxford, Oxford University Press.
Davies, R. (1977), “Hypothesis testing when a nuisance parameter is present only under the alternative”,
Biometrika, vol. 64, No. 2, Oxford, Oxford University Press.
Davig, T. and E. Leeper (2011), “Monetary-fiscal policy interactions and fiscal stimulus”, European Economic
Review, vol. 55, No. 2, Amsterdam, Elsevier.
Dempster, A., N. Laird and D. Rubin (1977), “Maximum likelihood from incomplete data via the EM algorithm”,
Journal of the Royal Statistical Society, vol. 39, No. 1, Hoboken, Wiley.
Franses, P. and D. van Dijk (2000), Non-Linear Time Series Models in Empirical Finance, Cambridge,
Cambridge University Press.
Galí, J. and R. Perotti (2003), “Fiscal policy and monetary integration in Europe”, Economic Policy, vol. 18,
No. 37, Oxford, Oxford University Press.
Hamilton, J. (1994), Time Series Analysis, Princeton, Princeton University Press.
(1991), “A quasi-Bayesian approach to estimating parameters for mixtures of normal distributions”, Journal
of Business and Economic Statistics, vol. 9, No. 1, Milton Park, Taylor & Francis.
(1989), “A new approach to the economic analysis of nonstationary time series and the business cycle”,
Econometrica, vol. 57, No. 2, Cleveland, The Econometric Society.
Holland, M. (2005), “Monetary and exchange rate policy in Brazil after inflation targeting”, University of
California, Berkeley [online] https://core.ac.uk/download/pdf/6357247.pdf.
Kim, C. J. and C. Nelson (1999), State-Space Models with Regime Switching, Cambridge, MIT Press.
Koop, G. (2003), Bayesian Econometrics, Hoboken, Wiley.
Krolzig, H. (1997), Markov-Switching Vector Autoregressions: Modelling, Statistical Inference and Application
to Business Cycle Analysis, Berlin, Springer.
Leeper, E. (2005), “A simple model of the fiscal theory of the price level”, Cambridge, Indiana University/
National Bureau of Economic Research (NBER), unpublished.
(1991), “Equilibria under ‘active’ and ‘passive’ monetary and fiscal policies”, Journal of Monetary Economics,
vol. 27, No. 1, Amsterdam, Elsevier.
Lima, E., A. Maka and M. Mendonça (2007), “Monetary policy regimes in Brazil”, Texto para Discussão,
No. 1285a, Rio de Janeiro, Institute for Applied Economic Research (IPEA).
Lütkepohl, H. and M. Kratzig (eds.) (2004), Applied Time Series Econometrics, Cambridge, Cambridge
Univesity Press.
Martins, M. (1980), “A nominal theory of the nominal rate of interest and the price level”, Journal of Political
Economy, vol. 88, No. 1, Chicago, The University of Chicago Press.
Mello, L. (2005), “Estimating a fiscal reaction function: the case of debt sustainability in Brazil”, OECD
Economics Department Working Paper, No. 423, Paris, Organisation for Economic Co-operation and
Development (OECD).
Mendonça, M., C. Santos and A. Sachsida (2009), “Revisitando a função de reação fiscal no Brasil pós-real:
uma abordagem de mudanças de regime”, Estudos Econômicos, vol. 39, No. 4, São Paulo, University
of São Paulo.
Minella, A. and others (2002), “Inflation targeting in Brazil: lessons and challenges”, Working Papers series,
No. 53, Brasilia, Central Bank of Brazil.
Moreira, T. (2011), “Brazil: an empirical study on fiscal policy transmission”, CEPAL Review, No. 103
(LC/G.2487-P), Santiago, Economic Commission for Latin America and the Caribbean (ECLAC).
(2009), “Mecanismos de transmissão da política fiscal no Brasil: uma investigação empírica”, Brasilia,
National Treasury Secretariat.
100 CEPAL Review N° 135 • December 2021
Fiscal and monetary policy rules in Brazil: empirical evidence of monetary and fiscal dominance
Moreira, T. and F. Soares (2012), “Brazil: the international financial crisis and counter-cyclical policies”,
CEPAL Review, No. 106 (LC/G.2518-P), Santiago, Economic Commission for Latin America and the
Caribbean (ECLAC).
Moreira, T., G. Souza and C. Almeida (2007), “The fiscal theory of the price level and the interaction of
monetary and fiscal policies: the Brazilian case”, Brazilian Review of Econometrics, vol. 27, No. 1, Rio de
Janeiro, Brazilian Econometric Society.
Moreira, T., G. Souza and R. Ellery (2013), “An evaluation of the tolerant to higher inflation rate in the short run
by the Brazilian Central Bank in the period 2001-2012”, Revista Brasileira de Economia, vol. 67, No. 4,
Rio de Janeiro, Getulio Vargas Foundation.
Policano, R. and R. Bueno (2006), “A Sensibilidade da Política Monetária no Brasil: 1995-2005”, Niteroi,
National Association of Postgraduate Programs in Economics (ANPEC).
Salgado, M., M. Garcia and M. Medeiros (2005), “Monetary policy during Brazil’s real plan: estimating the
Central Bank’s reaction function”, Revista Brasileira de Economia, vol. 59, No. 1, Rio de Janeiro, Getulio
Vargas Foundation.
Sargent, T. and N. Wallace (1981), “Some unpleasant monetarist arithmetic”, Quarterly Review, No. 531,
Minneapolis, Federal Reserve Bank of Minneapolis.
(1975), “‘Rational’ expectations, the optimal monetary instrument and the optimal money supply rule”,
Journal of Political Economy, vol. 83, No. 2, Chicago, The University of Chicago Press.
Sims, C. (2001), “Stability and instability in US monetary policy behavior”, Discussion Paper, Princeton,
Princeton University Press.
(1999), “Drifts and breaks in monetary policy”, Discussion Paper, Princeton, Princeton University Press.
Sims, C., J. Stock and M. Watson (1990), “Inference in linear time series models with some unit roots”,
Econometrica, vol. 58, No. 1, Cleveland, The Econometric Society.
Taylor, J. (2000), “Reassessing discretionary fiscal policy”, Journal of Economic Perspectives, vol. 14, No. 3,
Nashville, American Economic Association (AEA).
(1993), “Discretion versus policy rules in practice”, Carnegie-Rochester Conference Series on Public
Policy, vol. 39, Amsterdam, Elsevier.
Teles, V. and M. Zaidan (2010), “Taylor principle and inflation stability in emerging countries”, Journal of
Development Economics, vol. 91, No. 1, Amsterdam, Elsevier.
Thams, A. (2007), “Fiscal policy rules in practice”, MPRA Paper, No. 2506, Munich, University of Munich.
Walsh, C. (2003), Monetary Theory and Policy, Cambridge, MIT Press.
Woodford, M. (2003), Interest and Prices: Foundations of a Theory of Monetary Policy, Princeton, Princeton
University Press