Business Cycles, Leading Indicators, and Fiscal Dynamics in Brazil

ABSTRACT This article aims to examine whether different fiscal instruments in Brazil, related to expenditures and revenues, anticipate the country's business cycle. The econometric methodology used is Nonlinear Autoregressive Distributed Lag (NARDL) Models, bounds testing approach to cointegration for monthly data ranging from Jan/2003 to April/2023. The following fiscal variables will be analyzed: (i) total, mandatory, and discretionary expenses; (ii) total, direct, and indirect taxes. OECD's composite leading indicator for Brazil will be our main independent variable, whereas Public Sector Net Debt and CPI‐IPCA Price Index will work as control variables. The estimation results show that: (i) there is a long‐run equilibrium (cointegration) between expenditures/revenues and the leading business cycle indicator; (ii) there is an extremely low speed of adjustment, indicating that any short‐run disturbance is slowly dissipated until the long‐run equilibrium is restored; (iii) as expected, a business cycle boom leads to an increase in total expenditures and taxations, but with some asymmetric behavior; (iv) when expenditures are broken down into mandatory and discretionary, the final result resembles the asymmetric behavior found in total expenditures; (v) as for the disaggregated tax receipts, it is clear that the total taxation's negative trajectory is more related to the dynamics of direct taxes.