Fiscal rules impact GDP: Public investment cuts worsen economic performance
The article examines how changes in interest rates affect the economy when government spending is limited by debt sustainability rules. Using a model of the Brazilian economy, the study shows that higher interest rates can lead to a need for fiscal adjustments to manage debt. The research finds that the impact on GDP after a monetary policy shock depends on the type of fiscal rule in place. Specifically, cutting public investments as part of the adjustment tends to worsen economic performance.