Fiscal policy in the BRICs

Abstract

This paper assesses the macroeconomic impact of fiscal policy shocks for four key emerging market economies – Brazil, Russia, India and China (BRICs) – using a fully simultaneous system of equations. We also estimate fiscal policy rules and analyze the importance of nonlinearity using a smooth transition (STR) model. Drawing on quarterly data, we find that government spending shocks have strong Keynesian effects for this group of countries while, in the case of government revenue shocks, a tax hike is harmful for output. This suggests that there is no evidence in favor of “expansionary fiscal contraction” in the context of emerging economies where spending policies are largely pro-cyclical. Our findings also show that considerations about growth (in the case of China), exchange rate and inflation (for Brazil and Russia) and commodity prices (in India) drive the nonlinear response of fiscal policy to the dynamics of the economy.