This paper assesses the challenges faced by the inflation-targeting regime in Brazil. The inflation-targeting framework has played a critical role in macroeconomic stabilization. We stress two important challenges: construction of credibility and exchange rate volatility. The estimations indicate the following results: (i) the inflation targets have worked as an important coordinator of expectations; (ii) the Central Bank has reacted strongly to inflation expectations; (iii) there has been a reduction in the degree of inflation persistence; and (iv) the exchange rate pass-through for ''administered or monitored'' prices is two times higher than for ''market'' prices. #
have found evidence of additional gains stemming from inflation targeting. Ball and Sheridan (2003) have found no evidence that inflation-targeting countries have enjoyed better performance in the OECD. 2. The deviations of inflation from central targets and from the upper bounds of targets were 81% and 167% higher than in developed economies, respectively (table available on request to the authors). 13 1.. Emerging Market Economies 0) (0 8 Developed Economies 3.72 2.50 Before IT After IT (Until 2002:2) Before IT After IT (Until 2002:2) Date of adoption inflation targeting Developed economies
We develop and estimate a DSGE model for the Brazilian economy as part of the macroeconomic modeling framework of the Central Bank of Brazil. The model combines the building blocks of standard DSGE models (e.g., price and wage rigidities and adjustment costs) with the following features that better describe the Brazilian economy: (i) a fiscal authority pursuing an explicit target for the primary surplus; (ii) administered or regulated prices as part of the consumer price index; (iii) external finance for imports, which amplifies the effects of changes in external financial conditions on the economy; and (iv) imported goods used in the production of intermediate goods. It also includes the presence of financially constrained households. We estimate the model with Bayesian techniques, using data since 1999, when inflation targeting was implemented in Brazil. Evaluation based on impulse response functions, moment conditions, variance error decomposition, and initial forecasting exercises suggests that the model can be a useful tool for policy analysis and forecasting. visit to the Central Bank of Chile, to which we are very grateful. We are also grateful to Tomiê Sugahara and José R. da Costa e Silva for their participation in early stages of the project, and Angelo Fasolo for his comments and suggestions.
ContentsThis paper investigates the presence of nonlinear mechanisms of pass-through from the exchange rate to inflation in Brazil. In particular, it estimates a Phillips curve with a threshold for the pass-through. The paper examines whether the short-run magnitude of the pass-through is affected by the business cycle, direction and magnitude of exchange rate changes, and exchange rate volatility. The results indicate that the short-run pass-through is higher when the economy is growing faster, when the exchange rate depreciates above some threshold and when exchange rate volatility is lower.
Este trabalho investiga a presença de mecanismos não-lineares de
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