The Spending Cap and Monetary Policy Effectiveness by Gustavo Ribeiro, Vladimir Teles, João Costa-Filho published by MPRA (1/2023)
What is the impact on the transmission of monetary policy in Brazil under the fiscal ceiling implemented in 2016? We find empirical evidence of the response of fiscal variables to monetary policy shocks by estimating a dynamic model factor. Then, we analyze whether the imposition of an expenditure ceiling affected monetary policy effectiveness in Brazil. We propose a heterogeneous-agents new keynesian model (HANK) to the Brazilian economy with s spending cap and find that the expenditure ceiling adopted by the country might have “muted” a fiscal transmission channel for monetary policy, reducing its impact on the output gap.