Posted

October 14, 2014 08:42:57 AM

Date

2014-09

Author

André Minella, Paulo Springer de Freitas, Ilan Goldfajn, and Marcelo Kfoury Muinhos

Affiliation

Central Bank of Brazil

Title

Inflation Targeting in Brazil: Constructing Credibility under Exchange Rate Volatility

Summary /
Abstract

This paper assesses the challenges faced by the inflation-targeting regime in Brazil. The confidence crisis in the future performance of the Brazilian economy and the increase in risk aversion in international markets were responsible for a sudden stop of capital inflows in 2002 that caused a significant depreciation of the exchange rate. 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.

Keywords

Inflation targeting, Brazil, monetary policy

URL

http://ecomod.net/sites/default/files/document-conference/ecomod2003/Minella.pdf

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