Fiscal Sustainability and Inflation Dynamics: The Case of Brazil

This paper examines the relationship between expectations of fiscal sustainability and inflation in Brazil. I use Vector Autoregressions (VAR) to analyze inflation dynamics and plot impulse responses using empirical data from Brazil from 2001-2019. I also introduce sovereign Credit Default Swaps (CDS) as a signal of expected future fiscal sustainability and find a correlation between CDS premia and unexpected inflation, supporting a fiscal theory interpretation of inflation. This work builds on literature that highlights the interdependent role of fiscal and monetary policy in inflation stabilization by focusing on Brazil, a country with a notable history of fiscal and monetary policy changes.

Inflation, monetary policy, fiscal policy, sovereign credit default swaps, fiscal theory of the price level, Brazil.