Fiscal Policy and Dynamic Effects on the Economy of Ceará in a General Equilibrium Analysis: the importance of sustainable and effective public investments

Abstract

The article presents a dynamic general equilibrium model calibrated for Ceará's economy with the main objective of evaluating the effects of public investments on the local economy. The study considers permanent and temporary changes in investment, as well as different levels of effectiveness of public capital in its contribution to the economy. The temporary increases portray a scenario in which the largest investments cause expansions in public consumption due to the need for equipment and built infrastructure to function. The model treats the economy of Ceará as a small closed economy, with a representative family deciding on consumption, leisure and savings, representative firms with production of final goods and local government. There is also the central government that affects the state economy through taxation and the transfer of resources. The simulations indicate important and positive effects of public investment on economic growth, consumption and private investment. The exercises demonstrate that temporary increases in investment followed by increases in public consumption lead to a less favorable long-term balance. They also demonstrate that the results in terms of economic variables are declining when investments are decreasing in terms of the effectiveness of the public capital stock, that is, for the same positive shock in the amount invested, the Ceará economy adjusts to a long-term equilibrium. less favorable as the effectiveness of public capital decreases. On the other hand, the gains are amplified when the effectiveness of the investment is increased. For the same level of public investment, the local economy achieves a better final balance when public capital demonstrates a greater power to contribute to the performance of the economy. Based on the results, the adoption of initiatives that contribute to making public investment sustainable over time and effective in achieving the intended objectives, is essential to allow the economy to position itself in a more favorable long-term balance for society. Finally, as demonstrated in the general equilibrium exercises for the economy of Ceará, sustainable and effective investments lead the economy to a potentially better macroeconomic balance, the scope of which is achieved with a more rational use of public resources.