Fiscal Volatility and Economic Growth: Analysis for Brazilian States

Abstract

This paper investigates how the volatility of economic activity, public investment and fiscal variables affects the growth of Brazilian federative units for the period from 1997 to 2016. In particular, it estimates the effects of fluctuations in expenses, revenues and public debt on economic growth. Results suggest that increases in local public investment and debt volatilities are detrimental to long-term growth in all locations. Additionally, these relationships are investigated for two groups of states with different sizes. Results by groups indicate that fluctuations in fiscal variables have a negative and greater effect in smaller states, while in larger states the volatility of public investment is associated with lower economic growth.