Monetary policy during Brazil's Real Plan: estimating the Central Bank's reaction function

Abstract

This paper uses a Threshold Autoregressive (TAR) model with exogenous variables to explain a change in regime in Brazilian nominal interest rates. By using an indicator of currency crises the model tries to explain the difference in the dynamics of nominal interest rates during and out of a currency crises. The paper then compares the performance of the nonlinear model to a modified Taylor Rule adjusted to Brazilian interest rates, and shows that the former performs considerably better than the latter.A função de reação do Banco Central do Brasilé modelada via um modelo TAR (Limiar Auto-regressivo) para dar conta da mudança de regime na determinação da taxa nominal de juros. O modelo faz uso de um indicador de crises cambiais para explicar as distintas dinâmicas da taxa nominal de juros durante e fora das crises. O desempenho do modelo não-linearé significativamente melhor do que o de uma regra de Taylor ajustadaàs taxas de juros brasileiras, demonstrando o comportamento dual da função de reação do Banco Central do Brasil.

Nonlinearities in Central Bank of Brazil's reaction function: the case of asymmetric preferences

“…Silva and Portugal (2001) estimated a Taylor rule for the periods that preceded and followed the inflation targeting regime and concluded that the experience acquired from the inflation targeting regime can be regarded as a case of credibility construction instead of an enhancement of Central Bank's conservatism. Salgado et al (2005) modeled the Central Bank's reaction function using a threshold autoregressive (TAR) model and found different dynamics for the Selic interest rate during and outside the periods of exchange rate crises. Minella et al (2003), Holland (2005), Policano and Bueno (2006), Soares and Barbosa (2006) and Teles and Brundo (2006) showed that in the inflation targeting regime the Selic interest rate strongly reacted to expected inflation.…”

An evaluation of the tolerant to higher inflation rate in the short run by the Brazilian Central Bank in the period 2001-2012

“…We highlight here a number of studies that estimate rules à la Taylor. These are ANDRADE and DIVINO (2001), MENDONÇA (2001), FIGUEIREDO and FERREIRA (2002), MINELLA et al (2002), FAVERO and GIAVAZZI (2002), MINELLA et al (2003), SALGADO et al (2005), MENDONÇA (2007), MOREIRA et al (2007), MODENESI (2011) andMOREIRA (2011). ROMER and ROMER (2002) make an interesting study on the implementation of U.S. monetary policy to the various mandates of the presidents of the FED based on the evaluation of the minutes of the Monetary Policy Committee (FOMC).…”

Abordagem discreta para a dinâmica da taxa Selic-meta

“…Outras regras também foram investigadas e comparadas (McCallum 2000, p. 7). Salgado et al (2005) propuseram a seguinte função de reação:…”

“…Nota-se forte semelhança com a função de reação proposta em Salgado et al (2005), representada na equação (5).…”