Can directed credit to investment exacerbate fiscal dominance?
DOI:
https://doi.org/10.1590/0101-41614933cckKeywords:
Fiscal dominance, Directed credit, DSGE modelsAbstract
This paper analyzes whether the use of directed (subsidized) investment credit can aggravate
fiscal dominance. For this, we use a new-Keynesian model with subsidy in the acquisition of
capital goods to firm producing capital goods. The results show that the increase in subsidy
forces the government to use inflationary tax to adjust its budget (fiscal dominance), but this
effect is very short term, following a sharp cut in current government spending, adjusting the
primary surplus leading to the economy recession.
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