Price Stability under Inflation Targeting in Brazil: Empirical analysis of the monetary policy transmission mechanism based on a var model, 2000-2008
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Abstract
With a view to offering a body of empirical evidence to assess the costs and benefits of Brazilian stabilization policy, we undertake an econometric analysis of the monetary policy transmission mechanism in Brazil during the period from the adoption of the inflation targeting regime (onwards ITR) to the subprime crisis (2000-2008). The exchange rate was the main channel of monetary policy transmission during that time frame. Furthermore, inflation sensitivity to the interest rate is low. Thus, a rise in the basic interest rate (Selic) generates relatively small benefits (a fall in inflation). However, an interest rate increase generates substantial costs: a slowdown in economic activity, the appreciation of the exchange rate, and an increase in public debt. Inflation’s low sensitivity to interest rates is seen as a result of problems in the transmission mechanism: a broken transmission mechanism reduces the efficiency of monetary policy. Price stability under ITR thus requires an excessively rigid monetary policy. The final outcome is, on the one hand, that inflation hardly gives in. On the other hand, the costs of high interest rates escalate. We conclude that the balance of costs and benefits of price stability under itr is unfavorable.
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How to Cite
de Melo Modenesi, A., & de Araújo, E. C. (2013). Price Stability under Inflation Targeting in Brazil: Empirical analysis of the monetary policy transmission mechanism based on a var model, 2000-2008. Investigación Económica, 72(283). Retrieved from https://journals.unam.mx/index.php/rie/article/view/40027
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