Empirical Evidence on the Relation between Fiscal Credibility and Central Bank Credibility: The Brazilian case

Montes, Gabriel; Oliveira, Ana Jordânia de; Nicolay, Rodolfo

doi:10.1590/0101-41614914gar

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Artigo de Pesquisa • Estud. Econ. 49 (1) • Jan-Mar 2019 • https://doi.org/10.1590/0101-41614914gar linkcopy

Empirical Evidence on the Relation between Fiscal Credibility and Central Bank Credibility: The Brazilian case

Authorship SCIMAGO INSTITUTIONS RANKINGS

Since the early 1990s, several countries have adopted inflation targeting (IT). However, IT may not be sufficient to ensure fiscal discipline, and governments can still pursue irresponsible fiscal policies under IT. The adoption of irresponsible policies, which lead to a weak fiscal credibility, could undermine the credibility of the central bank. In the present study, we investigate whether a correlation between fiscal credibility and central bank credibility exists. The study contributes to the literature since it presents evidence on the relation between fiscal credibility and central bank credibility. The empirical analysis uses different econometric techniques (OLS, GMM and TOBIT). The findings suggest a positive relation between fiscal credibility and central bank credibility

Keywords
Fiscal policy; Monetary policy; Credibility

Null Hypothesis:	Obs	F-Statistic	Prob.
CBCI does not Granger Cause FCI	166	1.13	0.35
FCI does not Granger Cause CBCI		4.46	0.00

	OLS	GMM	TOBIT
CONSTANT	0.435	0.173	0.356*
	(0.301)	(0.234)	(0.190)
	[1.447]	[0.741]	[1.871]
PSBR (-1)	-0.032	-0.051***	-0.058***
	(0.020)	(0.016)	(0.011)
	[-1.581]	[-3.081]	[-5.354]
AMD (-1)	0.011**	0.013***	0.016***
	(0.005)	(0.003)	(0.003)
	[2.287]	[3.780]	[5.165]
INDEX (-1)	0.004***	0.005***	0.003***
	(0.001)	(0.001)	(0.001)
	[3.303]	[4.320]	[5.354]
IR (-1)	-0.017**	-0.009	-0.029***
	(0.008)	(0.007)	(0.005)
	[-1.987]	[-1.260]	[-6.114]
ΔGDP (-1)	-0.067	-0.259	-0.305
	(0.394)	(0.291)	(0.254)
	[-0.169]	[-0.889]	[-1.204]
R²	0.915	0.899
R² Adjusted	0.913	0.895
F- Statistic (p-valor)	0.000
Left Censored Obs			0
Right Censored Obs			49
Uncensored Obs			110
Residual and Stability Diagnostics
Ramsey-RESET(1) (p-value)	0.000
Jarque-Bera (p-value)	0.005
ARCH(1) (p-value)	0.000
ARCH(2) (p-value)	0.000
LM(1) (p-value)	0.000
LM(2) (p-value)	0.000
Durbin-Wu-Hausman (p-value)		0.998
J-Statistc (p-value)		0.101
Instrument Rank		19

	OLS	GMM	TOBIT
CONSTANT	0.014	-0.024	0.014
	(0.257)	(0.157)	(0.135)
	[0.055]	[-0.154]	[0.105]
INFD (-1)	-0.033*	-0.055***	-0.033***
	(0.017)	(0.009)	(0.009)
	[-1.931]	[-6.204]	[-3.516]
IR (-1)	0.027**	0.033***	0.027***
	(0.012)	(0.007)	(0.006)
	[2.275]	[4.451]	[4.228]
D_ER (-1)	-0.620***	-1.822***	-0.621***
	(0.191)	(0.311)	(0.1558)
	[-3.248]	[-5.861]	[-3.983]
FCI(-1)	0.152	0.259**	0.152*
	(0.176)	(0.103)	(0.090)
	[0.866]	[2.520]	[1.684]
ΔGDP (-1)	2.556***	1.454***	2.556***
	(0.660)	(0.401)	(0.374)
	[3.874]	[3.629]	[6.838]
R²	0.484	0.274
R² Adjusted	0.468	0.251
F- Statistic (p-valor)	0.000
Left Censored Obs			0
Right Censored Obs			0
Uncensored Obs			169
Residual and Stability Diagnostics
Ramsey-RESET(1) (p-value)	0.069
Jarque-Bera (p-value)	0.167
ARCH(1) (p-value)	0.000
ARCH(2) (p-value)	0.000
LM(1) (p-value)	0.000
LM(2) (p-value)	0.000
Durbin-Wu-Hausman (p-value)		0.859
J-Statistc (p-value)		0.321
Instrument Rank		19

	Equation 1			Equation 2
	Dependent Variable: FCI			Dependent Variable: CBCI
CONSTANT	0.141		CONSTANT	0.025
	(0.211)			(0.136)
	[0.665]			[0.181]
NFSP (-1)	-0.048***		INFD (-1)	-0.057***
	(0.013)			(0.007)
	[-3.638]			[-8.004]
AMD (-1)	0.016****		IR (-1)	0.030***
	(0.003)			(0.006)
	[4.754]			[4.890]
INDEX (-1)	0.004***		D_ER (-1)	-2.046***
	(0.001)			(0.321)
	[4.552]			[-6.369]
IR (-1)	-0.013*		FCI(-1)	0.225**
	(0.007)			(0.087)
	[-1.916]			[2.568]
ΔGDP (-1)	0.091		ΔGDP (-1)	1.339***
	(0.255)			(0.368)
	[0.355]			[3.641]
R²	0.907			0.182
R² Adjusted	0.904			0.156
J-Statistic		0.171
Prob (J-Statistic)

	ADF				PP				KPSS
Series	Leg Lenght	Forma	Teste	10%	Bandwidth	Forma	Teste	10%	Forma	Bandwidth	Teste	1%
AMD	22	I/T	-3.43	-3.14	3.08	I/T	-3.36	-3.14	I/T	44.7	0.14	0.22
D_EXCH	10	I/T	-5.49	-3.14	0.661	N	-9.18	-1.62	I/T	4.88	0.14	0.22
PSBR	9	I	-3.59	-2.58	2.61	N	-1.36	-1.62	I/T	47.1	0.15	0.22
∆GDP	13	I	-3.16	-2.58	8	N	-1.95	-1.62	I	10	0.26	0.74
INDEX	12	I	-3.38	-2.58	0.429	N	-1.62	-1.62	I	141	0.42	0.74
INF_DEV	13	I/T	-1.60	-3.14	7.33	N	-2.25	-1.62	I	60.7	0.15	0.74
SELIC	13	I	-3.55	-2.58	20	N	-0.90	-1.62	I	129	0.38	0.74

Lag	AIC	SC	HQ
0	0.468	0.506	0.483
1	-16.691	-16.577	-16.644
2	-27.377	-27.188	-27.300
3	-33.000	-32.734	-32.892
4	-35.149	-34.808	-35.011
5	-35.803*	-35.385*	-35.633*
6	-35.7780	-35.284	-35.578
7	-35.7584	-35.189	-35.527
8	-35.7281	-35.083	-35.466

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Departamento de Economia; Faculdade de Economia, Administração, Contabilidade e Atuária da Universidade de São Paulo (FEA-USP) Av. Prof. Luciano Gualberto, 908 - FEA 01 - Cid. Universitária, CEP: 05508-010, Tel.: (55 11) 3091-5803/5947 - São Paulo - SP - Brazil
E-mail: estudoseconomicos@usp.br

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[1] Source: author's elaboration Notes: Marginal Significance Levels:

[TFN1] ^***
denotes 0.01,

[TFN2] ^**
denotes 0.05 and

[TFN3] ^*
denotes 0.1. Coefficients in bold, standard errors in parentheses and t-statistics in square brackets. Regarding OLS estimates, due to the problems of autocorrelation and heteroscedasticity, the reported t-statistics in the OLS estimates are based on the estimator of Newey and West (1987).