Discretionary fiscal policy and disagreement in expectations about fiscal variables empirical evidence from Brazil

The present paper provides evidence in support of the hypothesis that the use of discretionary fiscal policy creates disagreements in expectations about both public debt and budget balance. The analysis considers the Brazilian case. Brazil is an interesting case study once it presents serious problems of public accounts deterioration, and in addition it had the president of the republic removed from its position since she was condemned on the charge of having committed crimes of fiscal responsibility. The estimates are made through ordinary least squares, one-step generalized method of moments and two-step generalized method of moments. In order to give robustness to the results, the study also provides estimates through an autoregressive distributed lag modeling approach (ARDL). Besides, in order to dynamically analyze the relationships between discretionary fiscal policy and disagreements in expectations about fiscal variables, we present an impulse response analysis based on vector autoregressive (VAR) estimates. The results indicate that the adoption of discretionary fiscal policies increases the disagreement in expectations about fiscal variables, and thus creates uncertainties about the future behavior of both the public debt and the budget balance.