Forecasting Brazilian GDP under Fiscal Foresight with a Noncausal Fiscal VAR

Due to fiscal foresight, standard fiscal VAR models are inherently susceptible to issues of nonfundamentalness and noncausality, which can result in invalid estimates. While these problems have been extensively addressed in the fiscal literature, they have largely been overlooked in Brazilian fiscal VAR studies. To address this gap, we estimate a noncausal fiscal VAR model for Brazil – an alternative specification that may correct these issues – and use it to forecast Brazilian GDP. The results show that the noncausal VAR model outperforms the standard purely causal VAR in terms of forecasting performance, particularly when considering the typical Brazilian fiscal VAR dataset. This suggests that fiscal expectations may play a crucial role in shaping the dynamics of Brazilian GDP.