A note on inflation targeting and economic growth in Brazil

Abstract

This paper analyzes the relation between monetary policy and economic performance in Brazil during the period 1999-2006. In particular, it discusses the growth effects of the inflation targeting regime through its effects on aggregate demand. It is argued that monetary policy under IT reacts in a procyclical and asymmetric way to fluctuations in economic activity (too "tight" during recessions, not so "loose" during expansions). Such pattern may generate a downward bias in aggregate demand, with negative real effects on output growth and employment. Our results suggest that monetary policy has been procyclical and asymmetrical in Brazil under inflation targeting. The main economic policy implication of this study is that central banks should consider more seriously the real effects of monetary policy on output and employment.

A Influência Da Financeirização Sobre a Taxa De Juros Real Brasileira

“…A questão da confiança é outra justificativa normalmente utilizada para justificar abruptas elevações na taxa de juros (LIBÂNIO, 2010). Como economia emergente e com desequilíbrios estruturais, o Brasil tem dificuldades em recuperar, uma vez perdida ou colocada em dúvida, a confiança dos mercados financeiros.…”

“…Um terceiro ponto é elencado por Libânio (2010), segundo o qual há uma assimetria na política monetária com o estabelecimento do regime de metas de inflação -importante acréscimo no aparato macroeconômico brasileiro para sustentar o Plano Real. Em períodos recessivos, a queda da taxa de juros não compensa proporcionalmente suas elevações em períodos de expansão do produto.…”

“…É o objetivo da próxima seção. Libânio (2010), ele talvez seja um dos motivos para uma política monetária mais restritiva.…”

Excess Real Interest Rates and the Inflation Targeting Regime in Brazil: Monetary Policy Ineffectiveness and Rentiers’ Interests

“…This is compatible with an inflation expectation trap, since the result of this asymmetric behavior is a relatively high real interest rate. Libanio (2010) argues that the way that monetary policy has been conducted in Brazil under the ITR, with a floating exchange regime and a liberalized financial account, brings about an upward bias in interest rates, which harms aggregate demand and, as a consequence, affects the economic growth negatively. Using a VAR model, he shows evidence that monetary policy has been pro-cyclical and asymmetric in Brazil.…”

Inflation Targeting in Brazil: 1999–2006

“…13 On the other hand, the literature that estimates the reaction function of the BCB, after the adoption of IT, shows that the BCB reaction to inflation has been asymmetric: (i) the increase in the inflation rate generates a more than proportional reaction of the Selic; and (ii) BCB reacts very gradually (it means, it reduces the Selic very slowly) when there is a fall in the inflation rate and/or a sharp reduction in the output growth. 14 In the same connection, Libanio (2008) argues that the way that monetary policy has been conducted in Brazil under the IT regime and floating exchange regime with a liberalized capital account, brings about an upward bias in interest rates, which harms aggregate demand and, as a consequence, affects negatively economic growth. Using a VAR model, he produces evidences that shows monetary policy has been procyclical and asymmetric in Brazil, described by the expression "too tight during contractions, not so loose during expansions" (p.9).…”