Impact of External Debt and Other Macroeconomic Policies on Output in Brazil: A VAR Approach

This paper uses a VAR model to quantify the relative importance of external debt, exchange rates, monetary policy and other selected variables when explaining output fluctuations in Brazil. Using the money market rate as a policy instrument, impulse response functions indicate that shocks to the interest rate, the external debt, or the inflation rate have an inverse impact on output, while currency and stock prices shocks have a positive effect on economic activity. In the medium run, the explanatory power of the external debt rises while that of the money market rate and the real exchange rate decline. When money is considered as a monetary tool, output responds positively to shocks to the real monetary base or to stock prices and reacts inversely to shocks to the external debt, currency depreciation, or inflation. Therefore, the choice of different monetary policy tools is not neutral when affecting output.