Macroeconomics fluctuations, environmental budget and overshoot in Brazil: an analysis via GMM system approach

Abstract This paper investigates the short-term relationships between Brazilian macroeconomic aggregates and environmental budget through a system of simultaneous equations estimated by the generalized moments method (GMM system), for quarterly data from 2003/1 to 2021/4. Three scenarios for environmental degradation were considered: (1) a tight environmental budget (close to the ecological resilience threshold); (2) an environmental overshoot and (beyond the threshold); and (3) a comfortable environmental budget (well below the threshold). The results suggest that pollution shocks—proxied by increases in CO2 emissions—can trigger fluctuations on GDP (the ecological business cycle). These effects are more severe in scenarios of low or negative environmental budget. The estimated EE curve indicates that gains in industrial productivity significantly reduce environmental degradation. Moreover in overshoot scenarios, monetary policy also plays a role: higher interest rates lead to lower economic activity, indirectly improving environmental outcomes. However, when compared to productivity gains, this is only a second-best solution.