"The Keynesian Doctrine and its Application in the Brazilian Stock Market"

André Gonçalves de Freitas

Hatched by André Gonçalves de Freitas

May 19, 2024

4 min read


"The Keynesian Doctrine and its Application in the Brazilian Stock Market"


The Keynesian doctrine, named after the renowned British economist John Maynard Keynes, revolutionized the way governments interact with the economy. This doctrine introduced the idea that the public budget could be used as an instrument of fiscal policy, a concept that contrasted with prevailing economic theories at the time. Keynes argued that during economic recessions, the government could intervene and stimulate the economy by increasing public spending. Conversely, during economic expansions, the government could utilize the public budget to prevent overheating of the economy. This approach, known as expansionary fiscal policy, aims to increase aggregate demand and stimulate production and employment.

Keynesian Theory and the Brazilian Economy:

In Brazil, the Keynesian doctrine has played a significant role in shaping economic policies. The utilization of the public budget as a tool for fiscal policy has been instrumental in stabilizing the Brazilian economy and mitigating the impact of economic fluctuations. By increasing government spending during recessions, Brazil has been able to stimulate demand and promote economic growth. Conversely, during periods of economic expansion, the government has implemented measures to reduce public spending and control inflation, thereby maintaining stability.

The Keynesian Multiplier Effect:

One important concept in the Keynesian theory is the multiplier effect. The multiplier effect refers to the idea that an increase in government spending leads to a larger increase in national income and output. In the Keynesian model, the multiplier effect is influenced by various factors. For instance, the multiplier effect increases when there is a higher propensity to consume and invest, as these factors contribute to higher aggregate demand and economic growth.

Applying the Keynesian Model to Brazil:

To understand the application of the Keynesian model in Brazil, let's consider a simple Keynesian model with consumption, investment, government, and the external sector. Suppose the autonomous investment and government expenditure are both equal to 10. If the marginal propensity to consume is 40% of income, the equilibrium income and the tax rate applied to income will be determined as follows: [Provide calculations and explanations]

The Role of the Brazilian Stock Market:

While the Keynesian doctrine primarily focuses on fiscal policy, it also has implications for the financial sector, including the Brazilian stock market. The stock market reflects the overall health and performance of the economy. As government policies influence economic conditions, they indirectly impact the stock market. When expansionary fiscal policies are implemented, such as an increase in public spending, it can lead to higher corporate profits and increased investor confidence, resulting in a bullish trend in the stock market.

The New Keynesian Theory and its Implications:

In recent years, the New Keynesian theory has gained prominence, emphasizing the role of imperfect information and price rigidities in economic fluctuations. One particular aspect of the New Keynesian theory is the concept of "menu costs," which refers to the costs incurred by firms when adjusting prices. These menu costs contribute to price stickiness and can impact the effectiveness of fiscal policies in stabilizing the economy. Understanding these dynamics is crucial for policymakers when implementing fiscal measures to address economic fluctuations.


The Keynesian doctrine has significantly influenced economic policies in Brazil, particularly in the utilization of the public budget as a tool for fiscal policy. By understanding the Keynesian model and its implications, policymakers can effectively manage economic fluctuations and promote stability. Additionally, the Brazilian stock market is intricately linked to government policies, reflecting the overall economic health. To navigate these dynamics successfully, policymakers and investors must consider the principles of the Keynesian theory and adapt strategies accordingly.

Actionable Advice:

  • 1. During periods of economic recession, consider implementing expansionary fiscal policies by increasing government spending to stimulate demand and promote economic growth.
  • 2. When the economy is experiencing an expansionary phase, focus on controlling inflation and reducing public spending to maintain stability and prevent overheating.
  • 3. Stay updated on the New Keynesian theory and its implications, particularly regarding imperfect information and price rigidities, to better understand the dynamics of economic fluctuations and adjust fiscal policies accordingly.

By incorporating Keynesian principles into economic policies and understanding their implications for the Brazilian stock market, policymakers and investors can navigate economic fluctuations more effectively and promote sustainable growth.

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