Econometrics 2024, 12(4), 37; https://doi.org/10.3390/econometrics12040037 - 5 Dec 2024
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This study examines economic policy responses in Brazil during periods of financial stress, with a particular emphasis on the dynamics of both the impulse and rule components of fiscal policy. We offer novel empirical evidence on policy responses under both low and high
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This study examines economic policy responses in Brazil during periods of financial stress, with a particular emphasis on the dynamics of both the impulse and rule components of fiscal policy. We offer novel empirical evidence on policy responses under both low and high stress conditions, utilizing monthly data that span the past two decades. To this end, we construct a Financial Stress Index (FSI) and integrate it into a threshold-VAR framework. Additionally, we employ five distinct methodologies to decompose fiscal policy into its impulse and rule components. Our analysis yields two main findings. First, fiscal policy exhibits procyclical behavior in its impulse component and countercyclical behavior in its rule component across both regimes. Second, while monetary policy is countercyclical during high stress conditions, its impact remains largely statistically non-significant. These results suggest that policymakers should exercise caution when timing the implementation of expansionary fiscal policies, carefully considering the phase of the business cycle. Moreover, our findings carry significant implications for the ongoing discourse on fiscal stimulus and debt stabilization strategies, particularly in the context of financial stress.
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