Regime switching and fiscal multipliers in Brazil in 1999-2012: an empirical MS-SBVAR methodology assessment

Abstract

This paper tests the stability and estimates the signs and sizes of fiscal multipliers in Brazil from 1999 to 2012. For this purpose, it uses a Structural Bayesian VAR model with Markov Switching regimes (MS-SBVAR), which is a Bayesian estimation procedure in which all model variables are considered endogenous, and all parameters and values of fiscal multipliers can change with changes in the state of the economy. The estimates indicate stability of all multipliers along time, a significant change in the variance of residuals of the equations across states of the economy, a strong evidence that the fiscal multiplier of gross fixed capital formation of the public administration is greater than 1 and that the multipliers of the net tax burden is negative with module less than one. There is a weaker evidence that the fiscal multiplier of the public administration’s consumption is positive and smaller than 1. Therefore, the results suggest that the most efficient fiscal policy for a transitory or permanent expansion of the activity level is the change in spending of the gross fixed capital formation of the public administration.