Did the Taylor Rule Stabilize Inflation in Brazil?

Abstract

This paper characterizes the monetary policy in Brazil through a forward-looking Taylor-rule-type reaction function before and after the Real plan, which stabilized inflation in July 1994. The results show that the interest rate response to inflation was greater than one-to-one before stabilization and smaller than that afterwards, hence inverting the Taylor's principle. Several robustness checks, using mainly distinct proxies for output, output gap and data frequency strongly confirm the findings.