Testing for the government's intertemporal budget restriction in Brazil during 1823-1889

This article tests whether the government's intertemporal budget restriction was fulfilled during the Brazilian imperial period (1823-1889). To accomplish this, newly developed tests for cointegration with unknown structural breaks are applied. It is found that government spending and government revenue are cointegrated if the effect of two unknown structural breaks is taken into account. The estimated parameter vector reveals that the one-by-one relationship that is required for solvency does not prevail for the sub-periods before and after the first break, however it prevails for the sub-period after the second break. We interpret these findings as empirical support for the long-run government solvency in Brazil at the end of the imperial period.