IS THE BRAZILIAN FISCAL RESPONSIBILITY LAW (LRF) REALLY BINDING? EVIDENCE FROM STATE-LEVEL GOVERNMENT

The adoption of a set of fiscal and budgetary institutions for a better macroeconomic performance has been gathering support in various governments. This article states that Institutions matters and adopts the New Institutional Economics framework in its approach. After a brief review of the literature and introduction to the Brazilian case, it poses the following question: Is the LRF really binding in restraining state's indebtedness? The institutional theory, which backed up the formulation of the LRF, would provide a positive answer to this question. This article therefore investigates if this relation is sustained empirically. For this purpose an econometric model with panel data on state-level government is estimated including a dummy variable for the adoption of the LRF and accounting for other explanatory variables as well.