Essays on energy shocks and fiscal uncertainty in Brazil

Abstract

This dissertation consists of two essays that examine how policy-related shocks affect real and nominal variables in Brazil. The first essay estimates, over the period 1998–2024, the effects of structural shocks to electricity supply, aggregate demand, and unanticipated regulatory interventions—referred to as electricity-sector-specific shocks—on electricity generation, economic activity, tariffs, and inflation. A structural vector autoregressive (SVAR) model identified through sign and narrative restrictions is employed. The results indicate that supply shocks significantly reduce generation and output, while exerting limited effects on tariffs and inflation. In contrast, aggregate demand shocks and electricity-sector-specific shocks accountfor a larger share of tariff and inflation dynamics. In particular, electricity-sector-specificshocks play a central role in explaining tariff fluctuations, while generating only modest effects on real activity, underscoring the importance of regulatory transparency and policy coherenceto mitigate economic distortions. The second essay investigates whether fiscal uncertainty shocks transmit asymmetrically to the macroeconomy depending on whether they are associated with favorable (good) or unfavorable (bad) revenue surprises. Using monthly Brazilian data for the period 2004–2023, a revenue-based fiscal uncertainty index is constructed as the conditional volatility of the unpredictable component of total government revenue and is subsequently decomposed into mutually exclusive good and bad components. Estimates from a recursively identified VAR reveal pronounced asymmetries: bad fiscal uncertainty shocks arecontractionary and lead to lower inflation, whereas good fiscal uncertainty shocks generate more muted and heterogeneous responses. Taken together, the findings highlight the importance of distinguishing the nature of regulatory and fiscal shocks to better understand theirtransmission mechanisms and to inform economic policy in emerging economies.