Abstract
This paper provides empirical evidence of the lack of fiscal transparency’s effect (fiscal opacity) on the government’s budget deficit on economic growth expectations. Based on the Brazilian data from 2004 to 2018 and using signal-to-noise ratios, we built fiscal opacity indicators that measure the agents’ level of ignorance regarding the government’s budget deficit. The evidence from several regression models indicates that an increase in fiscal opacity undermines short-term expectations of economic growth (current year, 12 months ahead, and next calendar year). Moreover, the impact of fiscal opacity on growth expectations is more significant when we consider the manufacturing sector. The findings suggest that discretionary fiscal policy can damage economic growth expectations.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
Fiscal transparency is the result of several principles (see IMF, 2019). Throughout this study, the lack of fiscal transparency refers to the difficulty for private agents to anticipate the execution of the government’s budget.
Since the government’s effort to seek fiscal balance occurs mainly through restraining spending and increasing revenues, the deficit measure we used in this study corresponds to the government’s budget deficit (primary result).
In 2013, the CBB launched a new information governance policy that has become a benchmark for the public sector. As a result of this policy, in 2018, the CBB won the FinTech RegTech Central Banking Data Management Initiative Award.
To achieve growth expectations 12 months ahead, we use the method proposed by Dovern et al. (2012), that is, \(E\left[ {Y_{t,T + 12m} } \right] = \left( {\frac{12 - m + 1}{12}} \right)E\left[ {Y_{t,T} } \right] + \left( {\frac{m - 1}{12}} \right)E\left[ {Y_{t,T + 1} } \right]\).
The use of Taylor’s rule for setting the interest is part of the Brazilian inflation targeting framework (see Bogdanski et al. 2000). Hence, the monetary policy interest rate is endogenous to a measure that considers the departures of inflation expectations to the target.
Table 10 (appendix) provides descriptive statistics for all variables used in the different specifications.
For an analysis of the use of a similar measure on expectations of economic growth in Brazil, see de Mendonça and de Deus (2019).
Based on the results from the three unit root tests under consideration, at least two tests show that the series under analysis are I(0).
In addition to the lagged regressors, we also used as instrumental variables in the models: the market expectations of public sector net debt for the next 12 months (E(DEBTt+12m)); the market expectations of the monetary policy interest rate (Selic) for the next 12 months (E(SELICt+12m)); and the market expectations of inflation for the next 12 months (E(INFt+12m)). The maximum lag applied for each instrument was 12 (1 year) to avoid bias in the results. Moreover, the number of instruments used for all models is less than 15% of the total observations). A list of instruments for each model is available upon request to the authors.
As pointed out by de Mendonça and de Deus (2015) and Hallerberg et al. (2007), it is common to analyze the impact of institutional and governance variables on fiscal forecast error through fiscal contracts and decision-making power delegation. However, these variables are time-invariant, and thus, they are not adequate for an analysis that considers time series models.
Ibovespa is the main performance indicator of the stocks traded in B3 and lists major companies in the Brazilian capital market.
There is evidence that an increase in economic activity positively affects economic growth, see Dalgaard (2002).
For empirical evidence of the effect of a currency devaluation on short-term economic growth, see Habib et al. (2017).
For an analysis of the positive effect of inflation targeting credibility on economic growth, see de Guimarães e Souza, de Mendonça, and Andrade (2016). One of the transmission mechanisms that explain the perverse effect of the lack of monetary credibility on growth is in the behavior of interest rates. High credibility reduces the monetary authority’s need to make changes in the interest rate to control inflation, see de Mendonça and de Guimarães e Souza (2009).
See de Mendonca and Almeida (2019) for an analysis of the importance of government approval for business confidence.
For an analysis of the negative impact of the global financial crisis of 2008 on economic growth, see Chen et al. (2019).
Change in expectations of the exchange rate is significant in the service sector but not in the manufacturing sector. Although exchange devaluation can spur the manufacturing sector through an increase in exportation, there are adverse effects that can void it. A good example is the automotive industry. Exchange devaluation increases production cost by increasing the prices of imported inputs and reducing the supply of iron in the domestic market. Regarding the service sector, a good argument for the significant positive effect is the benefit of tourism in the country.
Weights were specified using the option “Normalized Loading,” meaning that the scores formed from this decomposition rule have variations equal to the corresponding eigenvalues.
References
Alesina A (2010) Fiscal adjustments: lessons from recent history. Ecofin Mettin, Madrid
Alesina A, Özler S, Roubini N, Swagel P (1996) Political instability and economic growth. J Econ Growth 1(2):189–212
Alt JE, Lassen DD (2006) Fiscal transparency, political parties, and debt in OECD countries. Eur Econ Rev 50:1403–1439
Arbatli E, Escolano J (2015) Fiscal transparency, fiscal performance and credit ratings. Fiscal Studies 36(2):237–270
Baker SR, Bloom N, Davis SJ (2016) Measuring economic policy uncertainty. Quarterly J Econ 131(4):1593–1636
Beetsma R, Giuliodori M, Wierts P (2009) Planning to cheat: EU fiscal policy in real time. Econ Policy 24(60):753–804
Blinder AS (2000) Central bank credibility: why do we care? How do we build it? Am Econ Rev 90(5):1421–1431
Bogdanski J, Tombini A, Werlang S (2000) “Implementing inflation targeting in Brazil.” In: Inflation Targeting in Brazil, Central Bank of Brazil
Capistrán C, López-Moctezuma G (2014) Forecast revisions of Mexican inflation and GDP growth. Int J Forecast 30(2):177–191
Chen W, Mrkaic M, Nabar MS (2019) The global economic recovery 10 years after the 2008 financial crisis. IMF Working Papers 19/83, International Monetary Fund
Cimadomo J (2016) Real-time data and fiscal policy analysis: a survey of the literature. J Econ Surv 30(2):302–326
Dalgaard C (2002) Idle capital and long-Run productivity. EPRU Working Paper Series 02-06, Copenhagen
de Deus JDBV, de Mendonça HF (2015) Empirical evidence on fiscal forecasting in Eurozone countries. J Econ Stud 42(5):838–860
de Deus JDBV, de Mendonça HF (2017) Fiscal forecasting performance in an emerging economy: an empirical assessment. Econ Syst 41(3):408–419
de Guimarães e Souza GJ, de Mendonça, de Andrade J (2016) Inflation targeting on output growth: a pulse dummy analysis of dynamic macroeconomic panel data. Econ Syst 40(1):145–169
de Mendonca HF, Almeida AFG (2019) Importance of credibility for business confidence: evidence from an emerging economy. Empirical Econ 57(6):1979–1996
de Mendonça HF, Auel GE (2016) The effect of monetary and fiscal credibility on public debt: empirical evidence from the Brazilian economy. Appl Econ Lett 23(11):816–821
de Mendonça HF, de Deus JDBV (2019) Central bank forecasts and private expectations: an empirical assessment from three emerging economies. Econ Modell 83(C):234–244
de Mendonça HF, de Guimarães e Souza GJ (2009) Inflation targeting credibility and reputation: the consequences for the interest rate. Econ Modell 26(6):1228–1238
de Mendonça HF, de Guimarães e Souza GJ (2012) Is inflation targeting a good remedy to control inflation? J Develop Econ 98(2):178–191
de Mendonça HF, Galveas KAS (2013) Transparency and inflation: what is the effect on the brazilian economy? Econ Syst 37(1):69–80
de Mendonça HF, Machado MR (2013) Public debt management and credibility: evidence from an emerging economy. Econ Modell 30(1):10–21
de Mendonça HF, Pessanha KM (2014) Fiscal Insurance and Public Debt Management: evidence for a large emerging economy. Economia. ANPEC 15(2):162–173
de Mendonça HF, Silva R (2016) Observing the influence of fiscal credibility on inflation: evidence from an emerging economy. Econ Bull 36(4):2333–2349
de Mendonça HF, Simão Filho J (2008) Macroeconomic effects of central bank transparency: the Case of Brazil. Cato J 28(1):111–130
de Mendonça HF, Tostes I (2015) The effect of monetary and fiscal credibility on exchange rate pass-through in an emerging economy. Open Econ Rev 26(4):787–816
Dincer NN, Eichengreen B (2014) Central bank transparency and independence: updates and new measures. Int J Central Bank 10(1):189–259
Dovern J, Fritsche U, Slacalek J (2012) Disagreement among forecasters in G7 countries. Rev Econ Statist 94(4):1081–1096
Eberhardt M, Presbitero A (2015) Public debt and growth: heterogeneity and non-linearity. J Int Econ 97(1):45–58
Fujiwara I (2005) Is the central bank’s publication of economic forecasts influential? Econ Lett 89(3):255–261
Geraats PM (2002) Central bank transparency. Econ J 112(483):532–565
Greenwood J, Hercowitz Z, Huffman GW (1988) Investment, capacity utilization, and the real business cycle. Am Econ Rev 78(3):402–417
Habib MM, Mileva E, Stracca L (2017) The real exchange rate and economic growth: revisiting the case using external instruments. J Int Money Finance 73(PB):386–398
Hallerberg M, Strauch R, von Hagen J (2007) The design of fiscal rules and forms of governments in EU countries. Eur J Political Econ 23(2):338–359
IMF (2019) The Fiscal Transparency Code. IMF fiscal transparency code, Washington DC
Islam R (2016) “Growth recovery in southern Europe: a dozen lessons, old and new.” Policy Research Working Paper Series 7877. The World Bank
Johnson RA, Wichern DW (1992) Applied multivariate statistical analysis. Prentice Hall, Englewood Cliffs
Kaufmann D, Bellver A (2005) “Transparenting Transparency: Initial Empirics and Policy Applications,” MPRA Paper 8188, University Library of Munich, Germany
Kholodilin K, Siliverstovs B (2009) Do forecasters inform or reassure? Evaluation of the German real-time data. Appl Econ Quarterly 55(4):269–294
Kopits G, Craig J (1998) Transparency in government operations. IMF occasional paper 158
Leeper EM (2010) Monetary science, fiscal alchemy. In: Proceedings - Economic Policy Symposium—Jackson Hole, Federal Reserve Bank of Kansas City, 361-434
MacKINNON JG (1996) Numerical distribution functions for unit root and cointegration tests. J Appl Econ 11(6):601–618
Merola R, Pérez JJ (2013) Fiscal Forecast Errors: governments versus independent agencies? European Journal of Political Economy, 32(C), 285-299
Ng S, Perron P (2001) Lag length selection and the construction of unit root tests with good size and power. Econometrica 69(6):1519–1554
Pedersen M (2015) What affects the predictions of private forecasters? The role of central bank forecasts in Chile. Int J Forecast 31(4):1043–1055
Perron P (1989) The great crash, the oil price shock and the unit root hypothesis. Econometrica 57(6):1361–1401
Perron P (1993) Erratum [The Great Crash, the Oil Price Shock and the Unit Root Hypothesis]. Econometrica 61(1):248–249
Pina AM, Venes N (2011) The Political Economy of EDP fiscal forecasts: an empirical assessment. EurJ Political Econ 27(3):534–546
Reinhart AM, Rogoff KS (2010) Growth in a Time of Debt. Am Econ Rev 100(2):573–578
Vivian VS, de Mendonça HF (2008) Public-debt management: the Brazilian experience. CEPAL Rev 94:145–162
Wooldridge JM (2001) Applications of generalized method of moments estimation. J Econ Perspect 15(4):87–100
Acknowledgements
Author Helder Ferreira de Mendonça has received research grants from the National Council for Scientific and Technological Development (CNPq - Brazil).
Author information
Authors and Affiliations
Corresponding author
Ethics declarations
Conflict of interest
The authors declare that they have no conflict of interest.
Human participants or animals
This article does not contain any studies with human participants or animals performed by any of the authors.
Additional information
Publisher's Note
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
Electronic supplementary material
Below is the link to the electronic supplementary material.
Appendix
Appendix
See Appendix Tables 10, 11, 12, 13.
Rights and permissions
About this article
Cite this article
de Mendonça, H.F., Calafate, V.R.L. Lack of fiscal transparency and economic growth expectations: an empirical assessment from a large emerging economy. Empir Econ 61, 2985–3027 (2021). https://doi.org/10.1007/s00181-020-02000-4
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s00181-020-02000-4