Impacts of Fiscal Policy, Monetary Policy, and Exchange Rate Policy on Real GDP in Brazil: A VAR Model

This article employs the VAR model to estimate the impacts of government debt, monetary policy, exchange rates, and other selected macroeconomic variables on real GDP in Brazil. Using the money market rate as a policy tool, the impulse response function indicates that in the long run, a shock to the real money market rate, external debt, or domestic debt has a negative impact on output and that a shock to budget deficit, currency depreciation, or stock market performance has a positive effect on output. Variance decomposition of output shows that the lagged output is the most influential variable and can explain up to 69.98% of the variation in real output in Brazil. External debt is the second most important variable and can explain up to 33.34% of output fluctuations. Up to 22.24% of output variance is attributable to the real interest rate. When real monetary base is considered as a monetary tool, the response of output to government deficit is negative, and the stock market can explain more output variance. Hence, the selection of different monetary policy instruments may yield different empirical results for some of the impulse-response relationships.