Constant real expenditure policy: the macroeconomic impacts of budget composition and a primary surplus
This paper analyzes Brazil's fiscal policy of constant real public spending and compares the efficiency of maintaining a primary surplus versus changing the budget composition to favor investment in promoting economic growth. The study uses a representative agent model with intertemporal utility maximization, perfect foresight, and an infinite horizon to examine the effects on consumption, investment, labor supply, output, interest rates, and welfare. The research finds that prioritizing investment over maintaining a primary surplus is more effective for economic growth and reducing the fiscal deficit.
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| Quick Facts | |
|---|---|
| Report location: | source |
| Language: | English |
| Publisher: | |
| Authors: | Mauricio Benegas, Emerson Luís Lemos Marinho |
| Geographic focus: | Brazil |
| Page count: | páginas. 191-21 |
Methods
The research method involves a theoretical model based on a representative agent with an infinite life, who makes decisions on consumption and labor to maximize future utility flows. The model includes a budget constraint and considers the effects of government expenditure on infrastructure and the primary surplus as a percentage of GDP. The study uses a closed economy setting and employs a differential equation to represent the government's budget constraint. The analysis includes short-run and long-run equilibrium dynamics, as well as the impact of anticipated and unanticipated fiscal policy shocks.
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Key Insights
The research examines Brazil's adoption of a constant real expenditure policy and its macroeconomic impacts, comparing it with the policy of maintaining a primary surplus as a proportion of GDP. The study uses a representative agent model with intertemporal utility maximization to explore the effects on consumption, investment, labor supply, output, and interest rates. It investigates both short-term and long-term impacts, as well as the response of the term structure of interest rates to fiscal policy shocks. Additionally, the relationship between fiscal policies and social welfare is analyzed. The findings suggest that a policy emphasizing investment over primary surplus maintenance is more conducive to economic growth and fiscal deficit reduction. The study also discusses the implications of anticipated versus unanticipated fiscal policy changes and the term structure of interest rates.
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Additional Viewpoints
Categories: Brazil geographic scope | English publication language | budget composition | consumption | economic growth | fiscal policy | interest rates | investment | labor supply | output | public expenditure | social welfare