Impacts Of The Aggregate Economic And Financial Conditions On Output In An Emerging Economy

Abstract

This study formulates the theoretical model based on the money market equilibrium, the goods market equilibrium, and an augmented aggregate supply function. The sample ranges from 1996.Q1 to 2009.Q3 and has 55 observations. Applying the generalized autoregressive conditional heteroskedasticity (GARCH) model, this paper finds that Brazil’s real GDP is positively impacted by real M2 money supply, the real stock price, world output and the expected inflation rate and is negatively influenced by the government deficit as a percent of GDP, the real BRL/USD exchange rate and the U.S. Treasury bill rate. The first and third quarters exhibit seasonal effects. Therefore, expansionary monetary policy is more effective than deficit-financed expansionary fiscal policy, and pursuing real appreciation, promoting a robust stock market, and maintaining a strong world economy will benefit the Brazilian economy.